COVID-19 and its effect on VAT recovery for charities

In many cases, COVID-19 has changed not only the overall value but also the relative composition of a charity’s income. Therefore, this may have implications on the charity’s VAT recovery due to the partial exemption method calculations and the annual adjustment.

For VAT registered charities that need to restrict their VAT recovery based on a partial exemption method, this change could impact the amount of overhead VAT they can recover as most recovery calculations are based on income. For example, retail sales declining relative to grant income could mean more non-business and less recovery. In contrast, sponsorship, increasing relative to exempt admission income could mean a higher recovery. There will be winners and losers.

VAT recovery calculations are normally finalised at the end of your VAT year that ends in January, February or March. We recommend that you estimate the impact that COVID-19 has had upon your VAT recovery now, before undertaking this annual calculation. This is because if your recovery has been detrimentally affected, it might be possible to seek a special recovery method from HMRC. This usually will need to be applied for before the end of the current VAT year. If you predict your VAT recovery percentage will fall as a result of COVID-19, get in touch, especially if you have an open capital goods scheme item.

This article was written by Helena Wilkinson, a charity specialist and Partner at Price Bailey. If you have any questions on how your VAT recovery might be impacted, you can contact Helena using the form below.