UHY's Sean Glancy and Lisa Burnside explain why the complexity of VAT deserves trustee attention and not some common VAT pitfalls that arise. They then highlight some practical examples which provide actionable strategies that trustees and finance teams can use to embed good governance and VAT compliance culture within their teams.
VAT accounting for charities is seldom straightforward and can bring many risks when incorrectly applied. In a sector defined by change, whether through new funding models, digital investment, expanding trading activity, mergers, operational redesign or changes in personnel, VAT risk can surface quickly and unexpectedly. VAT errors can bring financial exposure, reputational damage and unwelcome scrutiny, which can be significant.
Approached proactively, management of VAT can become a foundation for resilience, effective risk management and financial sustainability. Clear oversight and confident compliance allow trustees and finance teams to make informed decisions, secure in the knowledge that their VAT position is robust and defensible. It is also evidence of reasonable care, an expectation from HMRC.
Why VAT deserves trustee attention
VAT is particularly complex for charities. VAT recovery methods, mixed income streams and sector‑specific VAT reliefs mean there are very few ‘one size fits all’ answers. As VAT rules and case law constantly develop, the VAT position applied to date may no longer reflect how your charity operates today so needs to be regularly reviewed.
VAT risk can be highlighted at moments of change. For example, when a new finance director starts and asks questions about long‑standing processes, when a charity embarks on a capital project or major procurement, or where a funding model shifts towards more commercial income. In each case, VAT positions not reviewed for some time can quickly result in significant VAT costs or VAT risk arising.
Trustees have ultimate responsibility for tax compliance and governance. Beyond the financial risk, VAT errors can lead to time‑consuming engagement with HMRC and reputational concerns. Just as importantly, weak VAT governance can mean charities fail to recover VAT they are legitimately entitled to, putting unnecessary pressure on already stretched resources.
Common VAT risk hotspots /pitfalls
There are many VAT pitfalls that can arise for charities. For example, where activities of a charity evolve significantly, but the charity’s VAT recovery method has remained unchanged, this can lead to under/over‑recovery of VAT or positions difficult to justify, resulting in unwelcome financial impact.
Incorrect income classification is another common issue. Typically, incorrectly distinguishing between grant income and business income, which is not always clear cut. Getting this wrong can significantly impact VAT recovery and compliance positions.
VAT is often considered too late (for example, after contracts are signed or funding already committed), at which point, options are limited and unforeseen costs cannot be mitigated. Also, reliance on historic VAT treatment without clear documentation or supporting rationale/evidence can make even a reasonable position harder to defend.
Left unaddressed, VAT compliance issues represent clear and significant risk to the charity and its trustees. Addressed early and deliberately, they become opportunities to strengthen governance, improve cash flow and build confidence across the organisation. The difference between VAT as a source of risk and VAT as a source of resilience is highly influenced by the governance framework and leadership culture in place within charity organisations. Effective governance means that when potential VAT issues are identified, these are efficiently and effectively escalated and VAT is considered as part of decision‑making before transactions or activities happen, rather than afterwards.
VAT governance in practice
Appropriate VAT governance does not mean turning trustees into VAT specialists. It does mean ensuring VAT is considered at the right level and at the proper time so there is clarity over how risk is identified, reviewed and managed.
In practice, this works best when VAT is embedded into existing governance structures. Finance teams should feel able to challenge historic positions and escalate issues early so any errors can be corrected. Trustees and finance committees should understand where VAT is most material to their organisation and when advice should be sought, particularly during periods of change. Documenting VAT positions and the rationale behind them is key as this can make a significant difference if questions arise later.
Practical examples
Case study 1: the value of reviewing VAT arrangements
We worked with a newly appointed finance director who asked for a review of the charity’s VAT accounting arrangements, which had not been revisited for some time. Our review of activities, income and expenditure showed that the VAT recovery method in place no longer fairly reflected how income was being used. Some income had also been incorrectly classified as grant income. Left unchallenged, this position could have continued year after year.
We worked with the charity to develop a more equitable VAT recovery method and raised the issue with HMRC’s specialist charity team. The outcome was significant. Our client received a £600k refund, representing VAT under‑recovered over the previous four years. Crucially, a new VAT recovery method was agreed for the future, giving trustees confidence that VAT was now aligned with how the charity operated, reducing risk going forward.
Case study 2: considering VAT before committing to major procurement
We recently worked with a charity planning a £3m procurement to upgrade its computer equipment. We were asked whether anything could be done to mitigate the VAT cost.
By reviewing the business case and draft procurement documentation early, we were able to understand the purpose of the upgrade and how the equipment would be used. This allowed us to make a case that a VAT relief should apply. Given the way the relief has been litigated historically, we prepared a detailed submission and managed the dialogue with HMRC. The result was a £500k saving. However, the key lesson was not just the saving achieved, but the value of considering VAT at the planning stage rather than as an afterthought.
Case study 3: managing VAT risk on a major building project
VAT risk can be particularly acute on large capital projects. A charity commissioning a new building that would be used partly for its charitable purposes and partly by third‑party tenants came to us for advice. The management team were uncertain about the VAT treatment of the costs, both for budgeting and to understand whether mitigation was possible.
We were appointed to develop and implement a VAT risk and mitigation strategy, explaining the issues to the project board and stakeholders and negotiating with HMRC. As a result, VAT costs were mitigated by 95%, delivering a £9m saving. Just as importantly, the charity was able to evidence reasonable care. Trustees and funders were reassured and as much future certainty as possible was secured in an area where reviews are often retrospective.
Case study 4: early VAT planning on a heritage development
In another case, a conservation charity undertaking large‑scale works to historic buildings wanted to understand its VAT options before committing to a project with potential VAT costs of £3.5m. The buildings would be used for non‑business purposes, including free public access.
We advised on a range of mitigation options, including VAT museum status, zero or reduced rating for construction services, energy saving materials and Capital Goods Scheme implications. This allowed the charity to consider VAT alongside financial and operational decisions at an early stage. The options identified have the potential to deliver VAT efficiencies of up to £3.5m on development costs, alongside ongoing operational savings depending on the route taken.
Practical steps to move from risk to resilience
What actionable strategies can trustees and finance teams take from these examples to embed good governance and VAT compliance culture within their teams to support sustainable growth? In practice, resilience comes from a small number of consistent behaviours. In our experience, charities that manage VAT well tend to do a few things consistently:
- They proactively build regular VAT reviews/health checks into management processes and consider VAT implications before changes occur (rather than waiting for problems to arise at a later stage)
- They regularly review and update their VAT recovery methodology as activities evolve and operate robust apportionment methods
- They regularly review and monitor the VAT treatment of income streams and identify all available VAT reliefs to maximise savings
- They avoid reliance on a single individual by having strong internal VAT processes, controls, proper documentation and by sharing VAT knowledge within the wider finance and commercial teams
- They encourage a culture where historic VAT positions can be discussed and challenged constructively if errors are identified
- They keep up to date with changes in VAT law/guidance and seek VAT advice where required (such as for complex or unusual situations)
By recognising VAT as a strategic risk area and embedding it into leadership and finance processes, charities can move from managing risk reactively to navigating change with confidence. When embedded, these key VAT compliance checks allow charities to anticipate VAT risk in a managed way rather than reactively.
Author biography
UHY’s specialist VAT team is led by Partner Sean Glancy and Director Lisa Burnside, who have extensive experience advising charities and not‑for‑profit organisations on VAT, governance and risk management. They work closely with trustees and finance teams to help organisations strengthen compliance frameworks and build financial resilience in an increasingly complex environment.
Further information is available at www.uhy-uk.com or via charities@uhy-uk.com.