VAT on membership fees can be confusing. Even if your organisation is a non-profit or a registered charity, you may still need to charge VAT.
This post explores:
- An explanation of key VAT concepts
- Relevant guidance from the UK government
- The circumstances under which you need to charge VAT
- Ways your organisation may be exempt from charging VAT
- Other places to look to get charity VAT advice
Key VAT concepts
In order to understand VAT on membership subscriptions, you first need to have a broad grasp of the key concepts that govern VAT in general.
For all types of organisation, VAT only becomes relevant once your organisation reaches a certain has a VAT taxable turnover greater than the established threshold.
The current VAT threshold is: £85,000
The VAT taxable turnover is broadly defined as: “The total value of everything you sell in a 12 month period that isn’t exempt from VAT or out of scope”
Input and output tax
VAT is potentially relevant to both things you buy (inputs, like computers) and things you sell (outputs, like subscriptions). If your organisation is registered for VAT then you can usually claim back any VAT you pay on things you buy to the extent that it relates to taxable supplies.
Most membership organisations want to avoid charging VAT if possible. But if you have to charge VAT then one consolation is that you should then be able to claim back any VAT you pay on things you buy.
The rest of this post is primarily addressing output tax, i.e. tax you must charge on things you sell.
VAT only applies to ‘business activities’ but don’t be fooled by the use of the word ‘business’. Even if your organisation is not run for a profit, its activities may still be seen as ‘business activities’ from a VAT perspective.
The definition of business activities as it relates to VAT is vaguely defined and rests on case law, which is always open to interpretation. If in doubt it’s best to assume an activity is a business activity.
Non-business activities that aren’t covered by the VAT scheme (e.g. voluntary donations) are referred to as ‘out of scope’ of VAT.
VAT rates and exempt supplies
If the supply of goods or services is within the scope of VAT, the next question to ask is the rate at which VAT applies.
Business activities in the UK can be assumed to be taxable at the standard rate unless specifically reduced-rated, zero-rated or exempted from VAT in law.
The current standard VAT rate is 20%
Standard rate: the default for activities within the scope of VAT (e.g. consultancy services).
Reduced-rated: activities within the scope of VAT where the rate has been reduced (e.g. mobility aids for the elderly).
Zero-rated: activities within the scope of VAT where the rate is zero (e.g. printed publications).
Exempt: activities within the scope of VAT that have been granted a specific exemption (e.g. physical education and sports activities).
Out of scope: outside the scope of the VAT scheme (e.g. voluntary donations to charity).
VAT on membership fees
Do you need to charge VAT on our membership fees? To help assess this, try to answer the following questions for your organisation.
Are we below the VAT threshold?
If you are below the VAT threshold then you don’t have to charge VAT on your membership fees unless you choose to voluntarily register for VAT. Be aware this may change if you exceed the threshold in any 12-month period.
In this case you don’t need to worry about the rest of this article, but make sure you review this again if you approach the threshold.
Are our membership fees outside the scope of VAT?
If membership fees are voluntary you may be able to argue that the income is outside the scope of VAT. This would be the case if, for example, the benefits of membership are actually available to anyone whether or not they pay. If, on the other hand, members receive valuable benefits only if they pay, it is best to assume they are within scope.
The HMRC notice on clubs and associations explicitly states that the following are business activities for VAT purposes:
- providing benefits to members in return for subscriptions
- providing benefits to members in return for a separate charge
- making supplies to non-members for a charge
- admission to any premises for a charge
- providing other facilities to non-members in return for a charge
Can our membership fees be zero-rated?
The categories for zero-rated supplies rarely apply to membership fees.
Are our membership fees exempt?
Exemption is the most likely basis for avoiding the need to charge VAT on your membership fees. Whether or not your membership fees are exempt does not depend on charitable status. Some charities still have to pay VAT and many non-charities can claim exemption.
HMRC provides the following relevant exemptions:
- Sports club
- Trade unions and other representative bodies (more info)
- Bodies with aims that are in the public domain
- The aims of a ‘political, religious, patriotic, philosophical, philanthropic or civic’ nature
The last of these categories is the broadest. This exemption appears as though it could apply to a wide range of charitable organisations but HMRC has interpreted this narrowly in a number of cases. These cases have, however, often been successfully appealed.
Can we apportion fees to different benefits?
The last line of defence for membership organisations above the threshold, that can’t claim a full exemption, is to claim that at least a portion of the fees they charge do not incur VAT liability.
The normal situation is that a membership organisation must charge VAT on the entire membership fee. But, HMRC makes a limited exception for some non-profits. This allows them to ‘unbunble’ the membership fee and apportion different amounts to the different benefits included within the subscription. This is a complex tactic and you should certainly seek professional advice before attempting to use it.
Depending on the membership benefits you offer, this tactic can be useful for two reasons.
- It lowers the amount of VAT you charge
- It allows you to reclaim some of the VAT you pay on your purchases by including a zero-rated element into your membership offering.
VAT on events and conferences
Most membership organisations run a range of events and conferences. This area also gives rise to some tricky questions relating to VAT. In broad terms, if you are above the turnover threshold you should assume that VAT must be charged to all delegates unless an appropriate exemption applies or the place of supply is outside the UK.
To make the most of this exemption the event must fit the definition of ‘education’ found in the HMRC VAT Notice 701/30 on education and vocational training. Since most membership organisations are not profit making enterprises and many are charities, they often well placed to qualify.
Place of supply
For physical events the place of supply is generally straightforward: it is the place where the event is held. So if an event is subject to VAT and held in London then all attendees must pay VAT irrespective of where they come from.
For digital events, which have become more common of late, the situation is different and more complex and is covered in the HMRC guidance note on VAT rules for supplies of digital services to consumers. If an event or conference is delivered online only then it will be a digital supply and as such the place of supply will often be the location of the customer. This means that those attending digitally from outside the UK may avoid VAT that would otherwise be chargeable.
Membership software that handles VAT?
When you are considering membership management software it pays to choose software that will you deal with the nuances of UK VAT. To explore your options read our post on the best membership software for UK-based organisations.
Where to get charity VAT advice
This post has explained some of the key factors affecting VAT for membership organisations but it should not be relied on in isolation. This is a complex area and if you are in any doubt you should seek professional advice.
Most large accountancy and law firms that specialise in charity matters will be able to advise you further and there are also a range of smaller specialists who can help. If your current advisers can’t help, here are some possible alternatives.
- Peter Ladanyi: a sole practitioner specialising in this area
- Sayer Vincent: charity-focused accountants who can help on all areas of finance including VAT for membership organisations
- Bates Wells & Braithwaite: one of the leading law firms specialising in charity law and tax
- Constable VAT Consultancy: a specialist VAT consultancy