Q. We’ve just signed a contract to do some work on behalf of a well known charity. Our payment terms are 50% of the agreed amount upfront, 25% to be paid on completion of half of the contract, with the outstanding balance due once the project has been delivered in full.
However, when we submitted our first invoice, I was told that the charity wasn’t registered for VAT and that I would have to amend the invoice accordingly. I thought this was a little unusual so I asked a colleague of mine who works in another firm that carry out work on behalf of other charities if this was the case. He said that his firm charged VAT in the way they would any client. Is that the case here?
A. Generally, you should charge VAT in the normal way irrespective of whether the organisation you are dealing with has charitable status or not. There is no general exemption in respect of VAT for such organisations and therefore you should charge accordingly.
However, I can see how this could cause some issues for you – you don’t want to tell your client how to do their job or question their practices. As charities are not regarded as supplying goods or services in the way a trading company would be, they are neither obliged nor entitled to register and account for VAT on their income. However, since your company supplies good and/or services in the normal course of business, you must charge VAT.
The problem here is that the charity will not be entitled to a repayment of VAT incurred from its business dealings with you. It’s best to explain to them that you have to charge and that they should look into recouping any funds they feel entitled to themselves.
If you feel that they are being non-cooperative, you may have to renegotiate the terms of the contract to take into account a smaller margin if you’re left to foot the VAT bill yourself, or simply walk away from a project that isn’t as profitable as you first thought. This isn’t your problem but it will be if you don’t carry out normal business procedure.
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