VAT for Hackspaces

Larger hackspaces may start to approach the threshold where they have to consider VAT registration. Apart from the increased hassle of accounting for VAT, it’s possible that a hackspace may be considered “partially exempt” which makes accounting even more complex.

The VAT registration threshold is currently £85,000 turnover per year, but this only applies to the component of your turnover which would attract VAT if you were registered.

It should be noted that the rules for VAT are completely separate from those for Corporation Tax (CT), and just because something is liable for CT doesn’t mean it’s liable for VAT (and vice versa).

The main thing to remember is that freely-given monetary donations are outside the scope of VAT. This should include payments such as pledges for tools, as long as they don’t confer any benefits to the person pledging (such as priority use of the tool).

VAT on membership subscriptions

The major income source of most hackspaces is monthly membership subscriptions, and many spaces have a “pay what you like” scheme, normally with a mandatory minimum membership payment.

There has been some confusion about whether (and how much of) these subscription payments are subject to VAT.

I received an opinion from a partner at a large tax law firm in March 2015, who agreed with me that only the mandatory component of membership subscriptions should be considered within the scope of VAT, as long as the rest is clearly labelled as a donation. They added:

It should be made clear that the amount paid over and above the subscription is indeed a donation for which no additional services are provided in return. This could be done by notices around the Hackspace, or by perhaps amending any invoices/receipts that you give to members. It should be made clear on any invoice that the donated element is outside the scope of VAT.

I’d recommend also splitting this out in your accounts – so if your minimum membership payment is £5, the first £5 of each membership payment should go to a “Subscriptions” account, and the remainder to “Donations”.

If registration is unavoidable

If any space finds themselves in a situation where VAT registration is unavoidable, I’d highly recommend getting advice from an accountant or tax lawyer who specialises in VAT for non-profits.

It’s possible, although speculative, that hackspaces would not be considered “in business” for the purposes of VAT, and hence all their turnover would be out of scope. My friendly tax lawyer has said that this is a reasonable possibility, but it would likely require HMRC (and possibly a tax tribunal) to rule on this to avoid unpleasant future surprises.

Please also feel free to get in touch with me if this is the case.