Charities engage in various activities in the accomplishment of their charitable purposes. Such activities may include direct charitable services and trading activities such as sales of various items through shops. It is important for charities to know how such activities are dealt with regarding VAT to ensure they discharge their VAT obligations and avail themselves of the applicable VAT exemptions where permissible. Thus, this article analyses the various VAT implications for business vs. non-business activities conducted by charities. 

Business Activities for VAT Purposes

If charities engage in activities that comprise of sales of goods or supply of services for monetary returns, these are normally regarded as business activities in the context of the VAT. Any supplies that are made as part of business activities will be subjected to VAT at the standard or reduced rates like any other comparable business. In engaging in such activities, charities will have to:

• Charge and account for VAT on taxable supplies made as part of the business at the appropriate rate 
• If the value of the business’s taxable supplies is above the VAT registration limit the business must register for VAT. 
• Recover input tax incurred on expenses directly attributable to the supplies 

Business activities that are usually performed by Charities include the following;

• Retail sales of the donated merchandise 
• Catering services 
• Events with ticket sales 
• Some form of paid caregiver or paid childcare or paid educator 

Non-business activities VAT rules

Where charities offer goods or services free of charge as per their stated purpose, the provision is not regarded as a business activity. Supplies made in relation to affairs that are not regarded as business are generally treated as being made for ‘no consideration’ and therefore outside the scope of VAT, unless the affair is deemed a supply for VAT purposes. 

Some examples of typical non-business charitable activities include: 

• Giving shelter for free or food to anyone in need 
• Serving free meals or food hampers 
• Free counseling and education services provision

The following is a summary of some of the rules on VAT treatment of non-business charity activities: 

• Thus, as there is no consideration, there can be no VAT on the supplies themselves. 
• Input tax cannot normally be recovered on costs incurred for these activities. 
• The above rules do not apply to ‘designated charities’ that fall under special VAT refund schemes 

Deemed Supplies

While supplies made as part of non-business charitable activities are usually outside VAT, there are certain circumstances where they can be treated as deemed supplies subject to VAT. This commonly arises where:

• Goods or services that was used in the recovery of input tax are subsequently given away for free
• Goods become excluded from a charity’s business assets once input tax recovery occurs. 

- For example, a charity organization is eligible for an input tax on, say, purchased foods, but later uses the foods to feed the needy. 

On the other hand, deeming does not apply in any of the following circumstances:

• Initially it did not recover input tax 
• The deemed value is to some extent below the annual thresholds. 

Table: Business and non-business activities for charities

FAQs

Q: How does VAT apply to business and non-business activities for charities?

A: Business activities such as trading are subject to the usual VAT treatment, while non-business charitable activities are normally outside the scope of VAT unless they are treated as deemed supplies. 

Q: What are the VAT rules for non-business activities in charities?

A: Items for charitable purposes and other non-business activities do not attract VAT since there is no consideration involved. Input tax recovery is also generally prohibited, with exceptions made for designated charities under specific refund arrangements. 

Q: Can charities recover VAT on business activities in the UAE?

A: Indeed, charities are allowed to reclaim input tax that relates to those expenses that are used exclusively and directly for making taxable business supplies and where charities abide by general VAT recovery rules. 

Q: What defines a business activity vs. a non-business activity for VAT purposes?

A: Activities that include goods or services offered for monetary consideration are business-related and hence fall under the Value Added Tax. However, charitable non-business objectives that comprise free supplies are not business supplies and therefore not subject to VAT, with the exception of deemed supplies. 

Conclusion

In conclusion, It is important to understand VAT implications for business vs. non-business activities to ensure compliance with the UAE laws. Although business supplies of a charity are standard rated for VAT, it can apply for the special exempted status to make some input tax relief on some specific non-business purposes. Due to these numerous regulations in the VAT system, it is crucial to pay attention to the planning and tracking of activities to avoid any confusion in the charity operations contact corporate tax firm.