Why do grassroots football clubs often have to bear the VAT cost of the kit and equipment that they buy?
As the majority of clubs are unincorporated, with no special tax status, operating on a “not profit basis” (i.e. where any surplus is reinvested by the club in its activities) and are not VAT registered, the situation of paying VAT is actually very common for grassroots clubs.
When does VAT apply?
The key point to note is that the application of VAT depends on the nature of each of
- the supplier; and
- the supply of goods and/or services.
Rather than the organisation to which the supply is made. Although there are, for instance, certain VAT reliefs available to clubs registered as charities.
Most commercial suppliers (e.g. kit and equipment distributors) will be VAT registered since they operate for business purposes, trading with a view to profit, and will have either voluntarily registered with HMRC for VAT or they will typically have sales exceeding the compulsory registration threshold (currently £82,000 of taxable supplies). Since these suppliers are VAT registered, they are obliged to charge VAT to their customers where they supply taxable goods or services.
Most supplies of goods and/or services in this way are 20% standard rated for VAT purposes, which means an extra 20% is added to the unit price of the goods on checkout. Other taxable supplies can be 5% reduced rated (e.g. utilities such as gas and electricity, subject to tax status) or 0% zero-rated e.g. children’s clothing. This is often why many clubs think junior teams’ strips are exempt and they don’t pay VAT on them – in fact, the supply is still taxable, it is just that 0% VAT applies to the sale of kids’ clothes rather than the VAT standard rate 20%.
If the club, as the customer, is not VAT registered, the club cannot recover any standard rate VAT it is charged by suppliers from which it purchases good and/or services (known as ‘input tax’). As a general rule, you can only recover input tax incurred on the things that you buy in, to the extent that you then make taxable supplies to which VAT applies (known as ‘output tax’).
Not VAT registered?
If you are not VAT registered or you only make exempt supplies, you cannot recover VAT which has been charged to you. Typically, many clubs don’t therefore create any output tax to allow VAT recovery. For instance, members subscriptions are VAT exempt when paid to a club which is an ‘eligible body’ (i.e. essentially non-profit making, but other strict criteria also apply, a full definition of which can be found on HMRC’s site.
What does this mean for football clubs?
In practice, this can leave the club with an irrecoverable VAT charge. So the club therefore has to bear the cost of the extra 20% VAT charge without being able to recover it in the way that many other commercial businesses would ordinarily be able to.
Even if you were to change the club’s status to either a CASC or charity, this may not, in practice, improve the VAT position (although each would bring with it a number of other tax reliefs). CASCs do not benefit from any VAT reliefs whereas registered charities do in relation to certain supplies made to and by them.
In order to mitigate irrecoverable VAT, many charitable clubs choose to establish a wholly-owned trading subsidiary company which is VAT registered so that it then carries on all taxable trading activities on behalf of the club and is then able to recover legitimately VAT charged to the trading company by suppliers.
Changing tax status may present a more favourable position but this depends entirely on the specific circumstances of each club and should be explored further with specialist tax advisers before proceeding.