Top 10 VAT topics for non profit and social purpose organisations

Here is a summary of some of the main VAT changes, issues, and key challenges affecting the sector.

1. HMRC challenge VAT grouping in the welfare sector

HMRC has released Revenue and Customs Brief 2 (2025): the use of VAT grouping within the care industry, which is effectively an attempt to end charging VAT on care services that would otherwise be VAT exempt. This will likely impact care service providers who have used, or are considering using, an unregulated trading subsidiary to charge VAT on care services that would otherwise be VAT-exempt.

We cover everything on the VAT welfare structure planning which has ended by HMRC.

2. Pension VAT recovery

If you have a defined benefit pension scheme, your organisation should consider whether it is entitled to recover input tax on the management costs. The rules behind VAT recovery for funded pension schemes are complex, so organisations must follow the correct procedures to avoid losing out on VAT recovery.

HMRC considers the administration and management of pension schemes to be part of the employer’s normal business activity. Therefore, if the employer has a valid VAT invoice, it is possible for the VAT incurred on the management of the pension fund to be recovered by the employer (subject to the usual method of recovery for general overhead costs).

We cover everything non profit and social purpose organisations need to know on managing VAT on funded pension schemes. We are aware that there may be some changes being announced in this area and will be keeping the sector updated. 

3. VAT recovery on non-business activities

Following HMRC’s updated approach to non-business activity in June 2022, the issue of what constitutes non-business activity remains a complex area for the sector and continues to end up in the courts. However, the following cases have provided us with some key insights.

We explain the updated approach to non-business activity and why it is important.

• The Towards Zero Foundation successfully argued that its activities were business in nature, as the First-tier Tribunal deemed that the foundation’s free activities were a necessary precursor to making taxable supplies. It was also deemed that the combined costs incurred by the foundation were an “integral part” of its onward taxable business supply. This verdict set a precedent for other charitable organisations, which are trying to ascertain whether an activity is business or non-business.
• More recently, for Paradise Wildlife Park, the First-tier Tribunal applied the principles outlined in the Wakefield College case to determine that zero rating on building work was not permissible. Although the park is a charity, it was operating by way of business, and so receiving VAT relief as a relevant charitable purpose building was not possible.

4. VAT rates on greener buildings

Following the government’s decision to lower the VAT rate on installing certain energy-saving materials to zero, there was a consultation this year focused on expanding the scope of the relief. In the Autumn Statement, it was announced that these would be expanded from February 2024 to include more items, and they would apply to works to community centres, places of worship, scout huts, as well as residential buildings and certain charitable purpose buildings.

However, it remains a challenge to obtain these reliefs in practice, especially where other works are being undertaken or where it applies to vital cladding remediation. With non profit and social purpose organisations under pressure to make various safety improvements and reduce their carbon emissions, obtaining tax reliefs for these works will be vital.

Watch our on-demand webinar on VAT for safer and greener buildings.

5. HMRC announces an increase to the capital goods scheme limit

The government has announced a proposed simplification measure to reduce the application of the capital goods scheme by raising the Capital Goods Scheme threshold to £600,000 from the current £250,000.

We cover everything you need to know on the changes to VAT recovery on fixed assets.

6. VAT year-end calculations and the need to review the partial exemption standard method override

VAT recovery is a key aspect within the sector, and therefore, partial exemption is vital to ensure the organisation is claiming the correct amount of VAT. We are seeing an increasing number of queries relating to the apportionment methods used within the sector, and HMRC is now, as a matter of course, asking for partial exemption annual adjustments and separate override calculations to ensure that the method being operated is fair and reasonable. Often, this results in a new method being acquired.

We cover everything on partial exemption and with regards to the standard method override and when this would apply.

7. Education is no longer exempt for independent schools

One of the biggest VAT changes to happen to the education sector in a very long time is the removal of the VAT exemption for education provided by private schools with effect from 1 January 2025. Private schools are now finding themselves faced not only with VAT but with partial exemption, the standard method override, the capital goods scheme, and the margin scheme – some very complex areas of VAT law.

We cover everything you need to know on our independent schools hub.

8. Letting income — room hire or facilities?

The VAT rules can often be complex to navigate, especially with regard to letting activities.  Over the years, various cases have resulted in a narrowing of the application of the VAT exemption covering land and buildings. Often, HMRC argues that the predominant supply is that of facilities (taxable) rather than an exempt land supply.

This is often complicated even further when the supply involves sports facilities or purpose-built buildings, such as theatres. Care should be taken in this area, especially when other services are offered along with the room hire.

Watch our on-demand webinar for more insight on the issues around the supply of land and buildings, and sports facilities.

9. Reverse charges

Not a new topic, but one that remains relevant, with some organisations still being caught by these rules, resulting in a need for them to register for VAT.

The general rule for cross-border services means that UK VAT falls due on most services that are acquired from outside the UK. This is the main reason that many non profit organisations are registered for VAT since the expenditure counts as income for the purposes of the limit for compulsory VAT registration (currently £90,000).

Watch our on-demand webinar or read our article to learn more about the technical details on the application of the reverse charge.

10. Compliance checks

HMRC published guidelines for VAT compliance in September 2024, setting out HMRC’s recommended approach to governance, controls, and processes regarding VAT accounting, focusing on risk management and how to reduce the risk of making errors. The guidelines apply to all VAT-registered businesses. We are aware that HMRC is discussing these guidelines with taxpayers as part of routine inspections.

At the time of writing, there are 10 key sections in the guidelines covering a range of areas, we cover everything you need to know on HMRC’s guidelines for compliance. We also cover hints and tips for organisations on how to prepare for a VAT audit.    

How can we help?

Our VAT team has extensive knowledge of HMRC and works with a wide range of organisations. We also have in-depth knowledge of the application of VAT and Customs duties relevant to your industry.

For further information or to discuss how any of the key points highlighted in this insight may apply to your organisation, please contact Hayley Hill or your usual Crowe contact.