Value Added Tax (VAT)

Introduction

Value Added Tax (VAT) is charged on most goods or services by a ‘taxable person.’ This includes a sole trader or partnership, limited company or charity. It should be noted that charitable status does not automatically exempt an organisation from applying VAT. Any reference to a charity in this guidance does not mean that the charity is required to be registered with the Charity Commissioners. It is required that the organisation has essentially charitable aims, and is able to demonstrate that, ideally from its written Constitution.

This guidance provides basic guidance on VAT. Where a Making Music member group has a specific VAT issue, it is recommended that appropriate advice be sought. See Section 11.

Contents

1. Registration for VAT - obligatory
2. Registration for VAT - voluntary
3. VAT rates
4. Income subject to VAT
5. Income exempt from VAT
6. Issuing invoices
7. Supplies to charities
8. Cultural exemption
9. Fundraising events
10. Partial exemption
11. Advice from Making Music

1. Registration for VAT – obligatory

A Making Music member group will be required to be registered for VAT if its taxable turnover in any period of 12 calendar months exceeds the registration threshold. This is currently £85,000 (September 2023), and is usually increased in March/April each year (see the current rate here) Where a member group has income which is exempt, ie: not ‘taxable,’ then that does not count towards its taxable turnover.

Where member groups are registered for VAT, they have to submit periodical VAT Returns to Her Majesty’s Revenue & Customs (HMRC). This summarises VAT on income (output tax), and VAT on expenditure (input tax). Submission of Returns is now made online, and payment usually by electronic means.

If an error is discovered on a Return that has already been submitted, this can be amended on a later Return without the need to notify HMRC. This applies on any error up to £10,000 in value.

2. Registration for VAT – voluntary

The comparatively high level of taxable turnover necessary for obligatory registration will exempt most Making Music member groups from the necessity to register for VAT. However, a member group may opt to register for VAT if its taxable turnover is below that limit. This would only be appropriate if there were a substantial amount of VAT to be recovered on its activities.

We do not recommend you register unless you have received specific VAT advice to that effect.

3. VAT rates

VAT chargeable on income items (outputs) is called ‘Output Tax’. VAT incurred on purchases of goods and services, etc. is known as ‘Input Tax’ and the expenditure items themselves are known as inputs. VAT is currently levied at three rates:

1. the standard rate - 20%
2. the reduced rate - 5% (e.g: fuel and power used in the home and by charities)
3. the zero rate - 0%

These are all treated as ‘taxable’. Thus, where a Making Music member group has outputs in any of these categories, that counts towards its taxable turnover.

Exempt outputs are quite different. It does not count towards taxable turnover. And, if a member group is registered for VAT, and makes exempt outputs, it will not be able to claim all its input tax (see section 10).

4. Income subject to VAT

The following is a list of those more common items of income which Making Music members are likely to have which would comprise taxable outputs for VAT purposes:

• Concert programmes (zero rated)
• Advertisements in concert programmes (but this is zero rated if the advertiser is a charity
• Sponsorship income, as long as the ‘benefits’ provided are of significant value
• Refreshments at concerts and functions
• Performing fees received
• Music scores (zero rated)
• CDs and DVDs
• Hire charges for musical instruments

The above list is not exhaustive and there may well be other items of income which are treated as taxable.

5. Income exempt from VAT

Certain income is exempt from VAT, or is outside its scope, and such items include:

• Donations
• Sponsorship income, where the only ‘benefit’ is a simple acknowledgement of the donor’s name
• Members’ Subscriptions (subject to meeting conditions)
• Dividends and interest receivable
• Grants from public bodies
• Prize money and awards
• Repayments of loans
• Income from educational activities
• Income from concerts (see Section 8 – Cultural Exemption)
• Fund-raising events (see Section 9 – Fund-raising events)

The above list is not exhaustive and there may well be other items of income which are treated as exempt, or outside the scope of VAT.

6. Issuing invoices

Although every Making Music member group is obliged to maintain accurate and up-to-date financial records, there is no obligation to issue an invoice for every piece of income.

Where the income is from another VAT-registered organisation or individual, then you must issue a VAT invoice. In other circumstances, you are only required to issue an invoice if the person specifically requests one.

An invoice must include the following information:

Member groups can issue simple receipts for payments received. This may be appropriate for subscriptions, ticket sales, etc.

7. Supplies to charities

There are three specific provisions that allow charities to claim VAT relief that may assist Making Music member groups. You don’t have to be a registered charity to claim these but you do have to provide evidence of your charitable status to the supplier: 

• For a registered charity this can be your Charity registration number 
• For non-registered charities you will need a letter of recognition from (HMRC) hich you should get when your register with them. 
• A Gift Aid reference number.

We have included the relevant references to legislation, and to HMRC material.

1. All supplies of advertising time and space in any form of media are zero rated when supplied to registered charities. Zero rating will also extend to all design and production costs of the advertisement. However, VAT relief doesn’t cover supplies which are purchased for:

• advertising in your own brochure, magazine, website, etc. and
• advertising addressed to selected individuals or groups, such as direct mailing. (VAT Act 1994, Sch 8, Group 15, Item 8; HMRC Notice 701/58)

If you have a leaflet or flyer printed to promote your own event, this may be either standard rated or zero rated:

• where the leaflet provides information about the event, and is designed to be read by an individual, and is printed on limp paper, no larger than A4, it is zero rated
• where the leaflet includes a section to be completed, or a discount voucher or code, it is standard rated.

2. Although most self-storage became standard rated for VAT from 1 October 2012, where the supply is made to a charity for use which is not business use, then VAT does not apply. HMRC guidance states: ‘The self-storage operator should obtain and retain evidence from the charity of its non-business use of the facilities in order to support not taxing the supply.’ Suggested form of words; Please be advised that [Making Music Group name] is using this space for its charitable activities, which consist of [description of activities]. (VAT Act 1994, Sch 9, Group 1, Item 1(ka), Note 15C(b))
3. In principle, the rental of a room, or rooms, is VAT exempt, unless the landlord ‘opts to tax,’ when he would then charge VAT to users. However, where the room(s) is to be used by a charity for a non-business purpose, the option can be ‘disapplied.’ This means the room use becomes exempt again. VAT Law provides that the user must issue to the landlord a certificate, so that he can ‘disapply’ the option to tax. We have a template certificate available to download. The certificate is a legal document. The recipient is obliged to act on it (having made appropriate checks, of course.). (VAT Act 1994, Sch 9, Group 1, Item 1; Sch 10, para 7. HMRC Notice 742A)

At the time of writing, HMRC have indicated that the rental of a room, or rooms, together with other supplies, such as sound or lighting technicians, use of box office, etc., is standard rated, not exempt. In the view of HMRC, the supply is much more than the mere rental of space, and therefore cannot be exempt. This has caused some difficulty for venues, as it is not clear where the line is between exempt and taxable. As far as the user is concerned, ‘disapplication’ is not available, and the VAT cannot be recovered. Thus, the cost of the room hire is 20% higher than it otherwise would be. We will continue to monitor this situation.

8. Cultural exemption

There is a specific VAT exemption for the right of admission to ‘a theatrical, musical or choreographic performance of a cultural nature’.

• In order to qualify for exemption, the following tests must be met:
• the organisation must be an eligible body;
• the event must be cultural; and
• there is no ‘joint venture’ arrangement with a commercial organisation.

An eligible body is a ‘non-profit making organisation’ which is ‘managed and administered on an essentially voluntary basis.’ Any surplus of income over expenditure has to be invested in the improvement of those same cultural facilities or events.

An organisation may have paid staff, and still qualify as being ‘managed and administered on an essentially voluntary basis.’ However, it is required that the executive or decision-making persons are not remunerated, except the reimbursement of out-of-pocket expenses.

The definition of a cultural event is quite broad, and HMRC accept any live performance of a stage-play, dance or music as being cultural. It will be judged on its own individual merits.

Where there is a joint-venture with another body, then the exemption may be jeopardised. Thus, where an event is promoted by a commercial promoter, then the exemption will not apply. In contrast, where a Local Authority, or other charity acts as promoter, then the exemption remains.

9. Fundraising events

The supply of goods and services in connection with fundraising events organised for charitable purposes by a charity or jointly by more than one charity is exempt for VAT purposes. Although VAT will not be recoverable, any income generated is also VAT-free.

Exemption applies to: admission charges; sale of commemorative brochures (which may be zero rated in any case); sale of advertising space in those brochures; other items sold by the charity during the event; and sponsorship.

A charity may have 15 events of the same kind in the same location in one financial year. A single event that runs over several days at the same location (such as a performance repeated on successive evenings) constitutes a number of separate events. In contrast, events held in different locations would still qualify for exemption (subject to the other conditions being met).

10. Partial exemption

There is a significant difference between taxable outputs and exempt outputs. In essence, a VAT-registered organisation can recover input tax when it has taxable outputs, but it cannot recover input tax when it has exempt outputs. Thus, where a Making Music member group has both taxable AND exempt outputs, it will only be able to claim some of its input tax. This is called Partial Exemption.

This is a complex matter and member groups subject to the partial exemption rules are encouraged to seek professional advice (see Section 11 below).

11. Advice from Making Music

VAT is, of course, much more complex than this basic document can cover. Your own specific circumstances may fall outside this guidance.

Information is available from HMRC, on their website, or you can contact their National Advice Service Helpline on 0300 200 3700. You can of course contact your own Accountant.

To ensure that you understand the correct VAT treatment or recovery of any room hire scenario or chat about whether its advantageous for you to be VAT registered talk to us at vatadvice.org to get specialist VAT advice. You can email enquiries@vatadvice.org or call 01223 628733. You can also follow us on Linked In.

We have a Corporate Member, VAT Advice (vatadvice.org) who offer Making Music member groups an initial response to any VAT query free of charge (If further work is required, then a charge will be payable). You can email them at enquiries@vatadvice.org or call 01223 628733. Just mention you are a Making Music member. 

We hope you find this Making Music resource useful. If you have any comments or suggestions about the guidance please contact us. Whilst every effort is made to ensure that the content of this guidance is accurate and up to date, Making Music do not warrant, nor accept any liability or responsibility for the completeness or accuracy of the content, or for any loss which may arise from reliance on the information contained in it.