Charity VAT review: 5 areas charities should review in 2026

In July this year, I attended the Charity Finance Group VAT & Tax Conference in London alongside colleagues from AAB’s Indirect Tax team. It was a valuable opportunity to hear directly from advisers and charity finance professionals about the VAT issues currently shaping the sector.

It was a timely reminder that VAT isn’t something charities can afford to view as a one-off exercise. As organisations change, VAT positions should evolve too. That’s why carrying out a regular charity VAT review is becoming increasingly important. With that in mind, here are five areas that I believe you should be considering in your next charity VAT review.

5 VAT areas charities should review in 2026

1. Grant funding versus contracts for services

One of the biggest areas of discussion at the conference was the distinction between grant funding and consideration for a supply.

Many organisations still assume that because income is described as a “grant”, it automatically sits outside the scope of VAT. However, one of the strongest messages from the day was that this assumption is becoming increasingly risky. HMRC is looking beyond labels and focusing on whether there is a direct link between the funding received and something the charity is required to deliver.

Indicators that a funding arrangement may be considered for a supply include:

• Defined deliverables or outputs.
• Performance targets or KPIs.
• Funding is linked to activities undertaken.
• Reporting obligations.
• A direct benefit received by the funder.

The implications extend beyond the VAT treatment of the income itself. If funding is incorrectly treated as non-business when it is actually business income, charities can face:

• Output tax liabilities.
• Reduced VAT recovery.
• Partial exemption implications.
• Potential VAT registration requirements.

The recent Court of Appeal decision in Colchester Institute reinforced this point. It demonstrated that funding labelled as grant income can, in substance, represent consideration for a supply where there are clear obligations and deliverables attached.

2. VAT registration risks

Another area that generated plenty of discussion was VAT registration.

It’s easy to associate registration purely with trading income, but in reality, charities are increasingly being brought into the VAT system for a much wider range of reasons.

Common triggers include:

• Funding arrangements are being reclassified as contracts for services.
• Growth in commissioned activities.
• New commercial income streams.
• Supplies of staff between connected entities.
• Overseas purchases are subject to the reverse charge.

One of my key takeaways was that registration reviews shouldn’t focus solely on traditional trading income. Funding arrangements, inter-entity transactions and overseas expenditure can all create registration obligations.

Charities receiving services from overseas suppliers may also become liable to account for VAT under the reverse charge, although an exception from registration may be available where the obligation arises solely due to services that would be zero-rated if supplied in the UK. This is particularly relevant when considering the distinction between qualifying charity advertising and standard-rated marketing services.

3. Business, non-business and partial exemption

For many charities, the biggest VAT exposure isn’t output tax at all. It’s VAT recovery.

Many organisations now have a complex mix of trading, exempt, grant-funded and fundraising activities. As these activities evolve, the methodologies used to recover VAT don’t always keep pace.

Something I found particularly interesting was the emphasis on methodology rather than simply the amount of VAT recovered. HMRC’s focus is increasingly on whether recovery methods remain fair and reasonable based on how the organisation currently operates.

For charities that have grown, diversified or significantly changed how they deliver services, it’s well worth asking whether existing recovery methods still accurately reflect the use of costs across the organisation.

4. Reverse charge, digital expenditure and the advertising v marketing distinction

The growing use of cloud software, digital platforms and overseas suppliers featured heavily throughout the conference.

Many charities purchase services from overseas providers without realising that the reverse charge rules may apply, even where no VAT appears on the invoice. For partially exempt organisations, this can create a significant irrecoverable VAT cost.

A particularly interesting discussion centred on the distinction between advertising and marketing.

While qualifying advertising supplied to charities can be zero-rated, HMRC’s view is that many digital campaigns don’t qualify because they target specific users using personal data and behavioural profiling. Instead, they’re treated as marketing services.

This has implications for services such as:

• Facebook advertising.
• Instagram campaigns.
• LinkedIn advertising.
• Search engine marketing.
• Other targeted digital campaigns.

It’s an area where assumptions can easily be made, making it worthwhile for charities to review how these services are being treated.

5. VAT reliefs and zero rating

The final area that really resonated with me was the reminder that charitable status doesn’t automatically provide access to VAT reliefs.

Whether considering advertising relief, construction projects, welfare exemptions or sporting exemptions, eligibility almost always depends on the detailed conditions being met.

Construction projects were highlighted as a particular area of ongoing risk. Zero-rating often depends on continued qualifying use, meaning changes in how buildings are used over time can affect the relief that was correctly claimed originally.

The message was straightforward but important: VAT reliefs should be reviewed against how an organisation operates today, not simply how activities were originally described.

 

Final thoughts: key takeaways for charities in 2026

Reflecting on the conference, my biggest takeaway was that VAT shouldn’t be treated as static. The conference was a timely reminder that VAT isn’t something charities can afford to view as a one-off exercise. As organisations change, VAT positions should evolve too. That’s why carrying out a regular charity VAT review is becoming increasingly important. It helps ensure VAT treatments continue to reflect how your organisation operates today.

Another theme from the day was HMRC’s increasing focus on the reality of how organisations operate, rather than simply relying on contractual wording or historic treatments. With more data-led compliance activity, it’s becoming even more important for charities to review whether their VAT position still reflects what they do today. With that in mind, here are five areas that I believe you should be considering in your next charity VAT review.

Funding arrangements evolve. Digital expenditure increases. New commercial activities emerge. Buildings are used differently. Organisations grow and diversify.

Those changes are often positive, but they can also create VAT consequences that aren’t immediately obvious.

Taking time to revisit long-standing assumptions can help identify risks early, improve VAT recovery where appropriate and avoid unexpected exposures further down the line. With HMRC continuing to focus on substance over form, regular VAT reviews are becoming increasingly valuable for charities of all sizes.

 

How AAB can help

Many of the VAT challenges discussed at the conference weren’t caused by charities’ misunderstanding of the rules. Instead, they reflected organisations evolving while historic VAT treatments remained unchanged.

At AAB, we work with charities across the UK to help identify and manage VAT risk practically and proportionately. Our support includes:

• VAT health checks and risk reviews.
• Funding, grant and contract-for-service reviews.
• Partial exemption and VAT recovery reviews.
• VAT registration, reverse charge and international VAT advice.
• HMRC dispute support, disclosures and remediation projects.

Whether you’re reviewing a specific transaction, planning a major project or simply looking for reassurance that your current VAT position remains appropriate, our specialist charity VAT team would be delighted to help.

To discuss any of the issues covered in this article, please contact Gabrielle Bird or your usual AAB contact.