1. Overview

1.1 What this notice is about

This notice explains:

• which activities of local authorities and similar bodies are business or non-business for VAT purposes
• the VAT registration requirements for local authorities
• when local authorities and certain similar bodies can reclaim VAT incurred on costs that relate to their non-business activities

You can read more detail about VAT as it applies to local authorities and other government and public bodies in the HMRC VAT Government and Public Bodies Manual and more information about:

• museums and galleries in the VAT Refund Scheme for museums and galleries (VAT Notice 998)
• academy schools in the ‘Academies’ section of the VAT Education Manual
• non-departmental public bodies in the VAT Government and Public Bodies 9640
• palliative care, air ambulance, search and rescue and medical courier charities in the VAT Refund Scheme for charities (VAT Notice 1001)

1.2 Who should read this notice 

You should read this notice if your organisation is a local authority or similar body.

1.3 The law

The law covered in this notice is:

• Section 41A VAT Act 1994 — read section 2 Business or non-business activities by local authorities and similar bodies for VAT purposes
• Section 42 VAT Act 1994 — read section 3 VAT registration
• Section 96(4) VAT Act 1994 — read section 3 VAT registration
• Section 33 VAT Act 1994 — read section 4 Recovering VAT by public bodies

2. Business or non-business activities by local authorities and similar bodies for VAT purposes

2.1 Definition of a public body

The term ‘public body’ takes its normal every day meaning. It includes government departments, non-departmental public bodies, NHS bodies, local government bodies, the police and the fire and rescue services.

2.2 The general rule

Because VAT is a tax on transactions, individual circumstances need to be considered according to their facts. But the general rule is that where a public body is funded by way of public expenditure (such as grant-in-aid) to do something for the public good, it’s unlikely to be engaging in business activities for VAT purposes. Such activities are outside the scope of VAT.

Conversely, where a public body supplies goods or services for consideration and by way of business, and it’s registered or required to be registered for VAT, such activities are within the scope of VAT. The term ‘business’ has a wide meaning for VAT purposes. Find more information about the meaning of ‘business’ and ‘business activity’ in the HMRC Manual VBNB21000VBNB20100 VAT Business and Non-Business activities.

The following outlines the main differences between business and non-business activities.

Business activities:

• are mainly concerned with making supplies to other persons, for any form of payment or ‘consideration’, whether in money or otherwise
• have a degree of frequency and scale
• continue over a period of time
• are within the scope of VAT and may be standard-rated, zero-rated or exempt

Non-business activities are:

• activities you carry out for no charge and no other form of consideration, including leases you grant, or the freehold sale of land and buildings, for the nominal payment of a peppercorn or a pound and where no other form of payment is involved
• activities you carry out for academies or multi-academy trusts in relation to travel for training, childcare vouchers and school trips
• activities you carry out for a charge but with no degree of frequency or scale, and without continuing over any period of time
• outside the scope of VAT

You can find out more about business and non-business in the VAT guide (VAT Notice 700) — section 4 The basic rules for VAT.

2.3 Section 41A VAT Act 1994

Under Section 41A of the VAT Act 1994, supplies of goods and services made by certain public bodies are not regarded as being made by way of business, and they’re therefore outside the scope of VAT, if:

(i) The public bodies form a part of the public administration.
(ii) The public bodies in question engage as public authorities when they make the supplies in question. This happens when they act under a special legal regime applicable to them, that is, under different legal conditions from those that apply to private traders, typically carrying out public interest activities for the service of the community.
(iii) This outcome would not significantly distort competition. Unless they’re carried out on such a small scale as to be negligible, supplies of a type listed in section 2.4 Activities listed in Section 41A of the VAT Act 199, are carried out in the course or furtherance of business when supplied by a public authority.

Public bodies which form a part of the public administration, such as government departments and local authorities, can treat activities that they charge for as non-business when they meet the conditions in the decision steps.

If the conditions are not met, they cannot treat their activities as non-business merely because they’re a central or local government body.

Decision

Follow these steps

You shouldto followdecide theseif steps.an activity is business or non-business.

Step 1

Is the public body acting as a public authority?

• if yes, go to step 2
• if no, the activity is business

Step 2

Is the activity listed in Section 41A of the VAT Act 1994?

• if yes, go to step 3
• if no, go to step 4

Step 3

Is the public body’s involvement in the activity on such a small scale as to be negligible?

• if yes, go to step 4
• if no, the activity is business

Step 4

Would it lead to significant distortion of competition with other bodies if the public body treated the activity as non-business?

• if yes, the activity is business
• if no, the activity is non-business

2.4 Activities listed in Section 41A of the VAT Act 1994

These activities are business activities, unless these are carried out on such a small scale as to be negligible:

• telecommunications
• supplying water, gas, electricity and steam
• transporting goods
• port and airport services
• passenger transport
• supplying new goods manufactured for sale
• certain activities of agricultural intervention agencies
• running trade fairs and exhibitions
• warehousing
• the activities of commercial publicity bodies
• running staff shops, co-operatives, industrial canteens and the like
• certain commercial activities of radio and television bodies
• travel agents

2.5 Supplies between local authorities

Supplies of services by one local authority to another local authority are not regarded as business activities provided that they are not made in competition with the private sector. Otherwise, they fall within the scope of VAT and VAT must be accounted for at the appropriate rate.

2.6 Non-business treatment and significant distortions of competition

Non-business treatment might lead to significant distortions of competition if it means that a public body:

• does not charge VAT on a supply, while competitors making similar supplies must charge VAT
• can recover the VAT attributable to an exempt supply or a non-business activity, while the VAT incurred by competitors in making similar supplies sticks with them as a real cost

Significant distortions of competition will occur when non-business treatment:

• places private traders at a commercial disadvantage compared to a public body
• deters private traders from starting up businesses supplying similar goods or services in competition with a public body

2.7 How to treat non-business activities by public bodies if there are no competitors

You can treat non-businessan activities,activity as non-business provided you’re sure that nobody else could carry out the activitysame (the test relates to the activity in question rather than to, for example, local or geographical trading situations):activity:

• in the same way the public body has to carry it out
• in similar conditions
• in achieving the same results the public body has to achieve

The test relates to the same activity in question rather than to, for example, local or geographical trading situations.

This will normally be the case when:

• customers or other recipients of the supplies in question, could not obtain the goods or services equally as well from some other supplier
• non-business treatment would not act as a disincentive to a private trader capable of going into business in direct competition

If you have any doubt whether special treatment will lead to significant distortions of competition you should seek our advice. You can also get help from professional bodies. Find more information on the Chartered Institute of Public Finance and Accountancy website.

2.8 Business and non-business activities

The HMRC Manual VATGPB3600 Non-business activities and Manual VATGPB8000 Other local authorities gives more guidance to help you decide if an activity is business or non-business.

3. VAT registration

3.1 Requirement to register for VAT

For bodies other than local authorities, the usual VAT registration requirements apply, as explained in Who should register for VAT (VAT Notice 700/1).

These requirements also apply to bodies:

• that are legally separate from a local authority
• that are not a joint board or joint committee
• where the value of your taxable supplies exceeds the threshold for registration

If the value of your taxable turnover is below the registration threshold limits, you can apply for voluntary registration.

3.2 Registering for VAT if you’re a local authority

Local authorities are required to register for VAT if they make any taxable supplies, whatever the value of those supplies is. But for ease of administration HMRC’s practice is to only enforce this where it’s anticipated that output tax will reach £1,000 a year.

3.3 Definition of a ‘local authority’

For VAT purposes the term ’local authority’ means:

• the council of a county, county borough, district, London borough, parish or group of parishes (or, in Wales, community or group of communities)
• the Common Council of the City of London, the Council of the Isles of Scilly, and any joint committee or joint board established by 2 or more of the foregoing
• in relation to Scotland, a regional, islands or district council within the meaning of the Local Government (Scotland) Act 1973, any combination and any joint committee or joint board established by 2 or more of the foregoing and any joint board to which section 226 of that Act applies

3.4 VAT groups and public bodies

Public bodies cannot usually meet the requirements of joining a VAT group. Find more information in Group and divisional registration (VAT Notice 700/2).

HMRC will normally grant requests by local authority joint committees to account for VAT under the registration of the lead authority, or any other member if we’re satisfied that:

• you do not want the arrangement merely for tax avoidance purposes
• it does not create distortion

4. Recovering VAT by public bodies

4.1 Rules on recovering VAT

The normal rules are explained in VAT guide (VAT Notice 700).

If you:

• do not make supplies in the course or furtherance of business, then you cannot recover VAT on related costs
• make taxable (including zero-rated) supplies in the course or furtherance of business, then you can recover VAT on related costs — read section 6.6 Recovering VAT on costs related to non-business activities
• make exempt supplies in the course or furtherance of business, then you cannot (subject to certain limits) recover VAT on related costs

4.2 Section 33 of the VAT Act 1994

Section 33 of the VAT Act 1994 provides information on refunds to (mainly) local government bodies where the VAT attributes to their:

• non-business activities — read section 2 Business or non-business activities by local authorities and similar bodies for VAT purposes
• exempt business activities (providing we consider it an insignificant proportion of the total tax they have incurred) — section 7 Recovering VAT on exempt business activities

Find more information in the HMRC Manual VATGPB4120 section 33
bodies — refund arrangements and Manual VATGPB4300 section 33
bodies — those admitted by Treasury Order.

For the avoidance of doubt, these bodies do not include a:

• joint board or joint committee set up by bodies other than local authorities
• body that merely obtains financial help from local authorities
• purely advisory committee that does not carry out local authority functions
• Community Council in England or Scotland
• Community Association
• parish meeting
• parochial church council
• village hall management committee
• charity

They’re also unlikely to include a board or committee where not only local authority but also other members have voting rights.

If you’re not registered for VAT you should read section 12 Claiming
refunds — public bodies not registered for VAT.

4.3 Adding bodies to the list

The Treasury has powers to add bodies to the list by means of an order and will consider applications from bodies where both conditions are met. The body must:

• undertake a function ordinarily carried on by local government
• have the power to draw its funding directly from local taxation

Your application should include evidence of how you meet both conditions.

Send your application to your Customer Compliance Manager, or if you do not have one, the public bodies enquiries team:

5. Recovering VAT on taxable business activities

5.1 Recovering VAT on costs related to taxable business activities by public bodies

You must be registered for VAT and follow the normal rules for input tax deduction. Find out more in:

• section 3 VAT registration
• section 6.6 Items that may be blocked from VAT recovery
• VAT guide (VAT Notice 700) — section 10 Introduction to input tax

5.2 Recovering VAT charged on goods imported or acquired from another country

You will have to pay VAT on goods arriving in the UK from another country. If the goods are for your business purposes, you can reclaim the VAT as input tax under the normal rules.

For goods arriving into Great Britain from a country outside the UK, read Paying VAT on imports from outside the UK to Great Britain and from outside the EU to Northern Ireland and Fiscal warehousing (VAT Notice 702/8).

For goods arriving into Great Britain from Northern Ireland or into Northern Ireland from Great Britain, read Accounting for VAT on goods moving between Great Britain and Northern Ireland from 1 January 2021.

For goods arriving into Northern Ireland from an EU member state, read VAT on movements of goods between Northern Ireland and the EU. If you receive goods into Northern Ireland from a member state of the EU, you will not normally have to pay VAT to the supplier if you provide them with your VAT registration number. But you must account for VAT in the UK on receipt of those goods on the VAT Return for the period in which the tax point occurs and you can treat this tax as input tax on the same return.

For goods arriving into Northern Ireland from a country outside the UK other than an EU member state, read Paying VAT on imports from outside the UK to Great Britain and from outside the EU to Northern Ireland and Fiscal warehousing (VAT Notice 702/8).

5.3 What to do if you receive services from overseas and have not been charged VAT

If the services:

• are taxed in the country where the supplier belongs, then you do not have to account for VAT on them
• are ones to which the ‘reverse charge’ procedure applies, then you must account for VAT as output tax and recover the input tax to which you’re entitled

Find more information in Place of supply of services (VAT Notice 741A).

5.4 Recovering VAT incurred in a member state of the EU

You cannot recover this VAT as input tax on your VAT Return, but you can sometimes reclaim it direct from the authorities in the EU member state where you paid it.

Find out how to claim a VAT refund in the UK if you’re established outside the UK in Refunds of UK VAT for non-UK businesses (VAT Notice 723A).

6. Recovering VAT on costs related to non-business activities

6.1 Using the special refund provisions to recover VAT on costs related to non-business activities

If you’re a section 33 body, you can recover the VAT you have incurred on your non-business activities only if you: 

• place the order 
• receive the supply 
• receive a tax invoice addressed to you 
• pay from your own funds (including funds awarded to you, for example, lottery funds) 

These conditions apply if you have incurred the VAT on:

• supplies you have received from VAT-registered traders in the UK
• goods you have acquired into Northern Ireland from a member state of the EU
• goods imported into Great Britain from outside the UK
• goods imported into Northern Ireland from outside the UK and EU

Find more information in the HMRC Manual VATGPB4120 section 33 bodies — refund arrangements and Manual VATGPB4300 section 33 bodies — those admitted by Treasury Order. There are similar arrangements for other bodies. 

You cannot recover VAT that would normally be irrecoverable in any circumstances (read VAT guide (VAT Notice 700)).

6.2 Registering for VAT in order to claim refunds

You do not have to register for VAT to claim refunds (read section 12 Claiming refunds — public bodies not registered for VAT.)

6.3 Recovering VAT under section 33 when you buy goods and services using money given for a specific purpose

You can recover VAT, provided you:

Step 1

Buy the goods or services yourself, that is:

• place the order
• receive the supply
• receive a VAT invoice addressed to you and pay

Step 2

Remain owner of the goods or services.

Step 3

Use them, or make them available, for your own non-business purposes.

Step 4

Keep sufficient records for HMRC to easily identify the goods and services you have bought and your reasons for buying them.

6.4 Examples of when VAT can and cannot be recovered

You will not be able to meet the requirements mentioned in section 6.3 Recovering VAT under section 33, when you buy goods and services using money given for a specific purpose, if the person giving you the money does so only on condition that:

• you give them something or do something for them in return
• another person benefits as a direct result of the payment

You can probably recover the VAT on goods and services used by:

• community and foundation schools which have been funded by the Parent Teacher Association and school funds
• welfare services which have been funded through amenity funds
• homes and schools for disabled people which have been funded by voluntary bodies

You cannot recover the VAT on goods and services used:

• on premises related expenditure at a voluntary aided school which has been funded by the governors
• on sports equipment at a youth centre you run which has been funded by an independent youth club — but only on condition that you give them exclusive use of the equipment
• for repairs to a building that have been funded by the owners of the building

If you carry out a project or pay for goods and meet the cost entirely from your own resources, and give the goods or services away free to another body, then your activity is non-business. You can reclaim the VAT you have incurred on the goods and services you have given away.

6.5 VAT refunds on goods and services you buy using money from trust funds

You can get a VAT refund but only when you act as sole trustee of a trust, for example, a village hall. For your claim to be valid:

• you must be acting as sole managing trustee without payment
• the activities of the trust must be so closely related to your own functions as an authority, that you cannot easily distinguish between them
• the claim must relate to the non-business activities of the trust

If we’re satisfied that recovery of VAT will create anomalies, then we may restrict it. 

If you’re a custodian trustee whose role is simply to hold the property of the trust, you cannot recover the VAT you have incurred, unless you’re also the sole managing trustee.

6.6 Items that may be blocked from VAT recovery

Some items have a restriction on VAT recovery. For example, a car which has an element of private use will have a blocking order preventing recovery of the VAT. If the car is used solely for work purposes then the VAT may be recoverable. For more detail on the meaning of theseprivate termsuse, andread othersection restrictions33 readof the VAT guideGovernment (VATand NoticePublic 700)Bodies manual. orFor themore HMRCdetail Manualon VATother Governmentterms and Publicrestrictions, Bodiesread —VAT sectionguide 33(VAT Notice 700).

7. Recovering VAT on exempt business activities

7.1 VAT incurred on costs related to exempt business activities

You can recover the VAT, but only where we consider this VAT (input tax attributable to exempt activities) to be an insignificant proportion of the total VAT you have incurred.

7.2 Insignificant proportion

Section 33(2) of the VAT Act 1994 allows local authorities to recover VAT attributable to exempt supplies so long as the amount involved is insignificant.

VAT attributable to exempt activities is insignificant only if it amounts to less than one of the following:

• £7,500 per annum
• 5% of the total VAT incurred on all purchases in a year

If at least one of these conditions is metmet, then this amount of VAT is considered ‘insignificant’.

The total VAT incurred includes that attributable to non-business activities. A year for section 33 bodies runs from 1 April to 31 March, even if they utilise special VAT periods. In calculating the VAT attributable to exempt business activities, section 33 bodies must include an appropriate proportion of VAT incurred on general expenditure including overheads (recharges do not need to be included in the overheads figure).

Where the amount of VAT attributed and apportioned to exempt supplies exceeds either of the conditions, then none of it can be recovered.

A calculation must be carried out at the end of each financial year and any necessary adjustment should be included in the VAT Return for the next period. It’s recognised that many section 33 bodies cannot complete their calculation in the period immediately following their yearyear-end. end. Extensions can be agreed with locally but should be no later than the September VAT period.

If there’s a change in the liability of a supply, then the related VAT should be apportioned for that financial year. Calculations for previous years cannot be revisited other than for the correction of specific errors, including adjustment where the proportion of previously estimated exempt use is later found to be incorrect.

If a local authority wishes to change their tax year they will need to notify their Customer Compliance Manager or the public bodies enquiries team mentioned in section 4.3 Adding bodies to the list.

7.3 Using a special section 33 VAT refund method even though all your business activities are exempt

You may use either the model method (read section 8 Model special section 33 recovery method and partial exemption), or any other agreed method. Any method must be ‘fair and reasonable’ and take into account the implications of conditions relating to the capital item adjustment scheme, as explained in section 4.3 Adding bodies to the list.

7.4 Choosing not to adopt a special section 33 recovery method

If you’re registered for VAT, you may use any alternative method of partial exemption calculation as detailed in Partial exemption (VAT Notice 706). Normal limits for recovering exempt input tax will then apply.

7.5 What to do if you want to opt for a special section 33 VAT recovery method to recover the VAT incurred

Step 1

Before the start of the financial year call HMRC to obtain advice on using a special section 33 recovery method.

Step 2

By the start of the financial year, in line with our advice, agree with us the broad principles of the method you intend using.

Step 3

By 3 months before the end of the financial year, complete your discussions and have the final method agreed in writing.

Step 4

By 3130 OctoberSeptember following the end of the financial year, conclude all annual calculations. If any adjustments are necessary these can be put on the next return.

7.6 Opting to use a special section 33 VAT recovery method but not agreeing it before the end of the tax year

If you do not agree a method before the end of the tax year, you cannot apply it to that year. Under these circumstances, you can only begin using it from the start of the next tax year, and in the meantime you should use the model special method. This is explained in section 8 Model special section 33 recovery method and partial exemption.

7.7 Including capital projects in section 33 recovery calculations

VAT on capital projects should be included in the calculation for the year in which it’s incurred.

8. Model special section 33 recovery method and partial exemption

8.1 The model special method for section 33 bodies

This method, which is based on the budget structure, takes a worst-case scenario. It assumes that, where a budget heading contains any exempt activity, then all the taxable expenditure within that heading is attributable to that exempt activity. If this broad brush approach shows that your input tax attributable to exempt activities is insignificant, you are not required to refine your calculations.

8.2 Using the model special method

The section 33 calculation method is based on the budget structure for a body. It adopts a worst-case scenario, but this can be refined as necessary. The process starts by working through steps 1 to 3, with a more detailed examination applied as necessary.

Step 1 — identification of exempt activities

List all budget headings or cost centres that contain any element of exempt activity.

Step 2 — identifying taxable expenditure

Within each of the budget headings or cost centres identified at step 1, record all expenditure (net of VAT) for both capital and revenue that would normally carry VAT.

Step 3 — percentage of exempt related input tax

Add up the standard-rated expenditure identified in step 2 and calculate the VAT by multiplying the total by 20%.

If it does not exceed the insignificance test (read section 7.2 Insignificant proportion) then no further calculations are required. The total VAT recovered should take account of any error correction or changes to estimation of input tax.

If the insignificance test is exceeded, it becomes necessary to make a progressively more detailed analysis of the amount of expenditure that’s put to exempt use. A section 33 body cannot be required to repay VAT relating to exempt supplies without more detailed calculations. If, at any stage, a result below the insignificance test is achieved then no further action is needed.

There is no set method of allocation or apportionment. A different method may be adopted for each particular area or activity based on the information available such as:

• number of staff
• amount of income
• floor area used
• number of sessions
• time

You must demonstrate that any method you use is fair and reasonable.

If, despite a more detailed analysis the insignificance test is still breached, then none of the VAT relating to exempt supplies is recoverable.

8.3 What to do if VAT identified at step 3 is not insignificant

You should now make a progressively more detailed analysis of the amount of expenditure that you put to exempt use. If, at any stage, you achieve a result showing that the VAT is insignificant, no further action is needed.

If the final result shows that the VAT is significant (more than the higher of £7,500 or 5% of the total VAT recoverable during the year), a method of allocation or apportionment should be agreed.

8.4 Set method of allocation or apportionment

There is no set method. You may adopt a different method for each particular area or activity based on the information available, such as:

• number of staff
• amount of income
• floor area used
• number of sessions
• time

You must demonstrate that any method you use is fair and reasonable.

8.5 The VAT identified still exceeds the ‘insignificant’ limit

If the VAT you have identified still exceeds the ‘insignificant’ limit during the financial year, despite detailed analysis of the amount of expenditure that you put to exempt use, you may reconsider the position over a longer period of 7 years. For example, you could look at the financial year under review, the previous 4 financial years and the forecast for the next 2 financial years. Any 7 consecutive years may be used as long as no more than 2 forecast years are included.

If, on average, over this 7 year period the VAT identified falls below the ‘insignificant’ limit the breach may be ignored. This is a rolling average.

You must keep details of the calculation with your VAT records. HMRC reserves the right to revisit the question of whether a breach is occasional and insignificant if it subsequently turns out that a local authority miscalculated its percentage in any given year. The same applies where there’s evidence of manipulation of figures.

8.6 If the VAT incurred still exceeds the ‘insignificant’ limit

If the VAT you have identified still exceeds the ‘insignificant’ limit, despite detailed analysis of the amount of expenditure that you put to exempt use, then you may not recover any of the VAT that relates to your exempt supplies.

8.7 Claim the VAT refunds you’re entitled to

Claims must be made within 4 years of the end of the month in which the supply, acquisition or importation occurred.

9. Amendments to section 33 recovery methods

Amendments to section 33 recovery methods to include additional conditions relating to the capital item adjustment scheme and change of intention.

9.1 Requirement for section 33 refund methods

This section explains the requirement for section 33 refund methods to include conditions relating to the capital item adjustment scheme and change of intention in the use of purchases.

9.2 Incurring VAT attributed to an intended activity under the capital item adjustment scheme but changing your intention before undertaking the activity

You must review your original attribution and possibly make an appropriate adjustment. First identify the VAT attributable to the activity for which there’s been a change of intention.

If the change of intention is from:

• a taxable or non-business activity to an exempt activity and you cannot treat the new total as insignificant (read section 8.2 Using the model special method), then you should add the VAT you have identified to the exempt input tax that you have already identified for the year in which you originally incurred the VAT — you must repay the VAT you have identified to us
• an exempt activity to a taxable or non-business activity and you can treat the new total as insignificant, then you should deduct the VAT you have identified from the exempt input tax that you have already identified for the year in which you originally incurred the VAT — you can reclaim the VAT you have identified from us if you have not already done so

You do not need to rework the calculation itself in full providing you do enough to quantify the new amount of exempt input tax.

9.3 Error in attribution

If you have made an error in attribution, you must rework the entire calculation for the relevant years.

9.4 Capital item adjustments

If you have a capital item as defined in Regulation 113 of the VAT Regulations 1995, and the extent to which you use that item in making exempt supplies changes, you may need to carry out an appropriate adjustment to the amount of VAT that you reclaimed on the initial acquisition.

9.5 How to make the adjustments

You must carry out accounting adjustments in accordance with the guidance in Capital goods scheme (Notice 706/2). The scheme covers the purchase of computers, land and buildings. The scheme was extended to cover aircraft and vessels in 2011. But both of the following variations are necessary:

• you should treat non-business use as if it were taxable use
• if your exempt input tax is insignificant, without taking account of any change of use adjustments, then you do not need to complete any further calculations, only if the insignificant test is already exceeded do you need to take account of the capital item adjustment

It follows that you must keep sufficiently detailed records of your capital items to enable you to carry out the necessary calculations, usually at least 10 financial years following that in which the expenditure was incurred.

9.6 Other information about special section 33 refund methods and the capital item adjustment scheme

If you:

• use the section 33 refund method, you must apply the conditions described here for the capital item adjustment scheme (read section 8 Model special section 33 recovery method and partial exemption)
• wish to use any alternative method for section 33 refunds, this must include acceptable provisions for dealing with capital item adjustments
• prefer to deal with partial exemption following the guidelines, explained in Partial exemption (VAT Notice 706), you’ll have to separate and identify the tax you have recovered that relates to your non-business transactions

10. Local authorities and community projects

This section applies only to local authorities, explained in section 3.3 Definition of a ‘local authority’.

10.1 Recovering VAT incurred on community projects, particularly work to village halls

If you’re a local authority, you may:

• agree with a voluntary group to set up a project fund into which any funds raised locally and any grants received by the voluntary group will be paid
• use this fund to make the purchase or pay for the work on behalf of the voluntary group

You cannot recover the VAT incurred as these funds do not belong to you.

10.2 Recovering VAT if you pay your own money into the project fund

You cannot recover the VAT unless the project fund is part of the local authority. For example, this may be the case where:

• the project fund forms part of your statutory accounts
• you retain control over how the money is spent

10.3 Recovering VAT incurred on work done to a village hall that you own

If you:

• use your own funds and use of the hall is for your own non-business activities, then you are not making a supply for VAT purposes and you can recover the VAT under section 33
• use your own funds and use of the hall is for your business activities, then you’re making a supply for VAT purposes and you can recover the related VAT if your supply is a taxable supply
• receive funds from another body in return for letting it use the hall, then you’re making a supply for VAT purposes and you can recover the related VAT if your supply is a taxable supply
• receive funds from another body in return for letting a third party use the hall, then you’re making a supply for VAT purposes and you can recover the related VAT if your supply is a taxable supply
• receive unconditional funding from another body — that is, the funding is freely given and neither the donating body nor a third party benefits, then the funding qualifies as a donation and you can recover the VAT provided you satisfy the conditions (explained in 7.3section ‘7.3 Using a special section 33 VAT refund method even though all your business activities are exempt)exempt’)

You must also consider: 

• if you allow someone to use the hall in return for non-monetary payment, that is a business activity 
• that we treat a hall as being owned by a local authority if it’s the sole managing trustee, but not if it’s a sole custodian trustee

10.4 Using your funds to finance building works to a hall that you do not own

If you:

• use your own funds to carry out work to the hall and give the work away to the owners of the hall (for example, a voluntary group) and receive nothing in return then you are not making a supply for VAT purposes
• receive anything in return from either the owners or a third party, then what you receive is likely to be consideration for the supply of the work to the owners, and the supply will normally be a business supply and you must charge VAT at the appropriate rate

10.4.1 Considerations

The consideration does not need to be in money. For example, if you carry out the work only on condition that you can use the hall afterwards, then use of the hall could be consideration from the owners for your supply of the work.

10.4.2 If the consideration is not in money but you’re not sure what its value is

You should read the guidance in the VAT Valuation Manual.

10.4.3 Acting as an agent of the owners for work to a hall, rather than as the main contractor

The work is not supplied to you but to the owners and you cannot recover VAT. But if you act as an agent in your own name, separate rules apply. You can find out more about this in sections 22 to 25 of the VAT guide (VAT Notice 700).

If you:

• can treat yourself as both receiving and supplying the goods or services then you’re liable to account for VAT on the onward supply of the work to the owners, you can recover as input tax any VAT you’re charged on the works, the input tax you claim is normally equal to the output tax you account for on the onward supply, and you must not reclaim the input tax before you have accounted for the output tax
• charge the owners of the hall for the service of arranging the work, then this charge is liable to VAT at the standard rate

10.4.4 Recovering the VAT incurred for the work done if you do not own the hall

If you:

• carry out the work, give it away and receive nothing in return, then this is not a business activity and you can recover the VAT under section 33
• act as a main contractor, then your onward supply to the owners is a business activity, you can recover the VAT under the normal rules, if your onward supply is taxable

11. Claiming refunds — public bodies registered for VAT

11.1 How to claim the VAT refunds you’re entitled to

You should use your normal VAT Return to claim any VAT you’re entitled to as a section 33 body.

Step 1

Include the amount of VAT in the ‘VAT deductible’ side of your VAT account and in box 4 of the VAT Return.

Step 2

Include the net value of your claim in box 7.

Step 3

Make your claim within 4 years of the due date of your return for the prescribed accounting period in which the VAT became chargeable.

11.2 Making a late claim

Adjustments to previous claims should be made in accordance with HMRC Manual VATGPB4960 section 33 bodies — refund arrangements. A summary should be kept detailing the errors and the periods covered.

Find more information about error correction in How to correct VAT errors and make adjustments or claims (VAT Notice 700/45).

12. Claiming refunds — public bodies not registered for VAT.

12.1 Public body in section 33 and not registered for VAT

If you’re a public body in section 33 and you are not registered for VAT, this section will help you make sure your claims for VAT refunds are valid. It also explains how to make them.

12.2 How to find out what goods and services you can recover VAT on if you’re in section 33 but not registered

Step 1

Read section 4 Recovering VAT by public bodies in this notice to find out the main principles.

Step 2

Check you meet the requirements explain in section 5 Recovering VAT on taxable business activities and section 7 Recovering VAT on exempt business activities

Step 3

Reclaim the VAT you have incurred only when you can attribute it to your:

• non-business activities (providing you can meet the conditions) — read section 6 Recovering VAT on costs related to non-business activities
• exempt business activities that are insignificant — read section 7 Recovering VAT on exempt business activities

Step 4

Because you’re not registered, you may neither:

• charge VAT on your taxable business activities
• recover the VAT relating to them

12.3 Claiming VAT refunds you’re entitled to

You can complete the online form VAT126 to claim a VAT refund as an organisation not registered for VAT.

12.4 What happens after we receive your claim

Once we receive your claim we will:

• provide you with a unique reference number to be shown on all claims — this does not mean that we have registered you for VAT
• make the refund claimed by Bacs transfer direct to the bank account you have entered on your claim

Your rights and obligations

Read the HMRC Charter to find out what you can expect from us and what we expect from you.

Help us improve this notice

If you have any feedback about this notice, email: customerexperience.indirecttaxes@hmrc.gov.uk.

You’ll need to include the full title of this notice. Do not include any personal or financial information like your VAT number.

If you need general help with this notice or have another question contact the VAT helpline.

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