VAT for charities: partial exemption, business vs non-business, and the new donation relief

There's a persistent myth that charities don't have to think about VAT. The reality is closer to the opposite: charities sit at the intersection of three of VAT's hardest concepts at once — exempt income, non-business activity, and partial exemption — and the organisations that get caught out are usually the ones who assumed none of it applied.

Three different "not standard-rated"s

The first trap is that "income we don't charge VAT on" hides three very different things:

• Non-business income — grants, genuine donations, much fundraising. This sits outside VAT entirely.
• Exempt income — certain education, welfare, some fundraising events. This is inside VAT but exempt, and it's what drags a charity into partial exemption.
• Taxable income — a shop, a café, room hire, paid services. Standard or reduced or zero-rated, but taxable.

The reason it matters: the VAT you incur on costs is only recoverable to the extent it relates to taxable business activity. Costs tied to exempt income feed the partial-exemption calculation; costs tied to non-business activity aren't recoverable as input tax at all and need a business/non-business apportionment first.

A charity with a grant-funded service, an exempt training arm and a taxable shop has to split its costs twice — non-business from business, then exempt from taxable — before it knows what it can reclaim. Miss a step and the reclaim is wrong.

If you've read our de minimis guide, the partial-exemption half of this will be familiar: the de minimis limits can still let a charity recover its exempt-related input tax in full, if the amounts are small enough.

The new donation relief

One genuinely helpful recent change: from 1 April 2026, a VAT relief applies to business donations of goods to charities. Broadly, a VAT-registered business can donate goods to a UK charity — for the charity to use, or to sell on for its purposes — without the donation triggering a VAT charge that previously made giving stock away costly. As with any relief there are conditions and records to keep, so check the current HMRC guidance for the detail before relying on it.

Where OneSixth comes in

Charity VAT is exactly the kind of multi-layered calculation that generic software ignores and spreadsheets get wrong under pressure. OneSixth runs the partial-exemption calculation — including the de minimis tests and the annual adjustment — and posts the result to your ledger with the workings attached, so the recoverable figure is defensible rather than estimated.