The supply of welfare services by a charity is normally a business activity for VAT purposes and, depending on the nature of the activity, would be exempt or subject to VAT at the standard rate.

However, by concession, charities that provide welfare services at significantly below cost to ‘distressed’ persons for the relief of their distress may treat those services as being non-business (i.e. outside the scope of VAT).

The benefit of the welfare services being non-business rather than exempt from VAT is that the charity can then take advantage of zero rating and reduced rate reliefs that rely on activities being for a ‘relevant charitable purpose’. For example, if a new building is procured by a charity that provides welfare services that fall within the above definition, the charity should be able to issue a qualifying use certificate in order to receive the supply at the zero rate. However, professional fees will always be standard-rated and it is only the contractor’s costs that can be zero-rated: see the section on design and build contracts.

To qualify:

• the services must be subsidised by at least 15 per cent
• the subsidy must be available to all distressed persons, i.e. both to those who can and cannot afford to pay the full rate and
• the services must be provided to the distressed individual and not, for example, to a local authority.

For further information see HMRC VAT Notice 701/1  section 5.18.2 What welfare services can be treated as non-business?