For many charity leaders, VAT is something that happens in the background; a complex administrative requirement we assume is handled correctly until, suddenly, it isn't.
At the British Paediatric Neurology Association (BPNA), we recently faced a significant challenge: the discovery that we had unknowingly exceeded the VAT registration threshold several years before it came to light.
Coming to terms with a retrospective tax liability is a daunting experience. However, the journey from discovery to resolution taught us invaluable lessons about financial governance, the importance of specialist expertise, and the resilience of a well managed charity.
The discovery
The issue surfaced shortly after I took over as Executive Director in November 2022. At the time, our London office was located at the Royal College of Physicians where other charities were located. One of the major benefits of that environment was the ability to talk with other CEOs in passing. During one of these conversations, a peer mentioned a recent external review that had flagged a VAT issue for their organisation.
That conversation was the catalyst. With the approval of my Trustees, I decided to initiate our own review. By October 2023, the reality became clear: we had passed the VAT taxable turnover threshold (currently £90,000) as far back as 1 January 2018.
Like many charities, our income streams are varied; membership fees, educational courses, and conference sponsorships. The line between "exempt" and "taxable" income is notoriously thin in the charitable sector; it is rarely black and white, and it is an area that arguably should be simplified by HMRC.
The initial feeling was one of significant professional and financial anxiety. I had a limited understanding of the next steps, but I knew the risk was substantial. We weren't just looking at future compliance; we were looking at years of back-dated tax, potential penalties, and interest that could exceed £250,000, a sum that would have made a serious dent in the reserves of a medium-sized charity like BPNA.
Navigating the risk
The first step was to resist the urge to panic and instead move toward professional disclosure. We first worked with our external accountants, HSA & Co, who were superb throughout the process. Their support was a tremendous help as we immediately sought expert VAT guidance. In the world of charity finance, "knowing what you don’t know" is a superpower.
Our advisors helped us quantify the "true" liability. Interestingly, it wasn't just about what we owed; it was also about what we could recover. By retrospectively registering, we were able to reclaim VAT on qualifying expenditure from those previous years, which helped mitigate the overall financial impact.
Managing the message
Transparency was the best practice. We had to brief the Board of Trustees, who naturally had concerns about how the oversight occurred and the impact on our mission. We focused on full disclosure without excuses, presented a clear roadmap for the voluntary disclosure to HMRC, and demonstrated how we were strengthening our internal systems. By taking a proactive approach, we maintained the trust of our Trustees and ensured the Board was an ally in the resolution process.
Full disclosure
One of the most delicate aspects of this period was stakeholder management. We explained the technical reasons for the oversight without making excuses to Stakeholders that owned us VAT. Fortunately we still had relationships with all of them and they were happy to pay back VAT owned.
Emerging stronger: lessons learned
What started as a crisis ended as a catalyst for positive change. We emerged with a much more robust financial framework. If you are a charity leader concerned about your own VAT status, here are my reflections:
- Listen to your network: The casual conversation with a peer saved us from a much larger crisis down the line. Don’t underestimate the value of peer-to-peer knowledge sharing.
- Don’t wait for an audit: If your charity is growing, commission a VAT review now. It is far better to make a voluntary disclosure than to wait for HMRC to find the error.
- Specialist advice is an investment: The nuances of charity VAT are too complex for generalist approaches. HSA & Co and our VAT specialists provided the clarity we needed to navigate the storm.
- Focus on the ‘Net’ position: The "sticker shock" of a back-dated bill is scary, but remember to calculate potential input tax recovery. The final figure may be more manageable than you first fear.
Final thoughts
Today, the BPNA is in a stronger position. Our financial governance is more resilient, and our relationship with HMRC is transparent and compliant. To my peers: an administrative error doesn't have to be a catastrophe. By facing the issue head-on and seeking the right help, you can turn a financial risk into a foundation for future stability.