Making Tax Digital for Charities: VAT & Compliance Explained

If you’ve recently become a VAT-registered charity or you’re about to become one, you are probably aware of Making Tax Digital (MTD). But you may not know the full extent of it, and what exactly you need to do.

In addition, between donations, grants, trading income, and partial exemptions, compliance can get complicated fast.

Read on to learn more about Making Tax Digital for charities and what you need to do to stay compliant.

Key points

• MTD is mandatory for VAT-registered charities ✅
  If your charity is VAT-registered, you must keep digital records and submit VAT returns using HMRC-approved software.
• Digital record-keeping and connected systems are essential 💻
  You need to store all VAT data digitally and make sure your systems are linked, with no manual copying between them. This will ensure your records are accurate, traceable, and fully compliant with MTD rules.
• Understanding taxable vs exempt income is critical 💰
  If you mix taxable and exempt activities, you may only be able to reclaim part of your VAT, so getting classifications right can save you money and prevent penalties.
• VAT gets more complex with partial exemption and mixed income 💳
  Many charities handle donations, grants, and trading income at the same time. You need to carefully split costs and calculate how much VAT you can reclaim, which can be tricky without clear systems in place.
• Using the right tools makes MTD much easier to manage 🥇
  ANNA helps you keep digital records, track taxes in real time, and file VAT returns correctly, so you can focus more on running your charity and less on admin.

Making Tax Digital for VAT: Overview and core requirements

Making Tax Digital (MTD) for VAT is HMRC’s programme that requires all UK VAT-registered businesses, including charities, to keep digital records and submit VAT returns quarterly using compatible, HMRC-approved software.

It’s been mandatory since April 2022, and it applies to all VAT-registered businesses above the £90,000 turnover threshold.

The main goal is to ensure accurate, real-time VAT tracking and minimise errors.

What are the core requirements for charities?

If you’re VAT-registered, you have to follow certain rules:

1. Keep digital records

Charities must keep all VAT-related records in a digital format, which includes:

• Income from donations, trading, or fundraising activities
• VAT charged on sales and services
• Expenses and VAT paid on purchases

2. Submit VAT returns through compatible software

Filing VAT returns manually on HMRC’s website is no longer possible under MTD.

Instead, your charity needs HMRC-approved software that can ‘talk’ directly to HMRC’s system.

If you’re using bridging software, every step of your accounting process must be connected digitally. It means no manual copying and pasting numbers from one system to another.

For example, if you record a donation in your fundraising system, that data should flow automatically into your VAT software.

3. Stay compliant with HMRC deadlines

VAT returns are still quarterly, but digital submission means that late filings or incorrect data can trigger penalties faster than before.

HMRC uses a points-based system for late VAT submissions.

Every time you file a return late, you get a penalty point. Once your points hit the set threshold, you’ll get a £200 fine. Every late return after that adds another £200.

Understanding VAT for charities: Taxable vs exempt

You charge VAT on taxable supplies. These are goods or services that:

• You sell in the UK (or the Isle of Man)
• You sell as a VAT-registered organisation
• You sell as part of your business activities
• HMRC hasn’t specifically listed as exempt

Most taxable sales are subject to the standard VAT rate, but some use reduced or zero rates. For example, goods donated to a charity for sale are zero-rated for VAT.

Common examples of VAT-exempt expenses include:

• Insurance, finance, and credit
• Education and training
• Charity fundraising events
• Membership subscriptions
• Renting or selling commercial property, although you can choose to charge VAT in some cases

What makes VAT complex for charities?

Unlike regular businesses, charities often handle exemptions, different types of income, and reliefs, which makes compliance trickier.

Here are the key things you need to watch out for:

1. Partial exemption rules

Many charities don’t just do one thing. For example, they might run a shop, which is taxable, and provide free services or receive donations, which are often exempt.

So, if you mix taxable and exempt activities like this, HMRC treats you as partly exempt.

That means you need to work out how much VAT you can reclaim.

2. Non-business income

Charities often deal with non-business income, such as donations or grants. They are usually exempt, so no VAT is charged or reclaimed.

Direct donations to your charity are usually outside VAT, but if your charity sells merchandise or tickets, that counts as business activity and may be VAT-liable.

So, if you use something for both business and non-business purposes, you need to split it first to see if it’s taxable or exempt.

Getting this wrong can mean overclaiming VAT, which can lead to penalties, or underclaiming, which means losing money.

This is exactly why MTD is so important. It forces you to keep clear, accurate digital records, making these calculations easier and more reliable.

3. New VAT relief on donated goods

In April 2026, the government tightened a few important tax rules that affect charities, sports clubs (CASCs), and donors.

The main reason is to make sure tax reliefs are used properly.

3.1. Tainted donations

Before April 2026, HMRC looked at the reason a donation was made. However, from April 2026, they focus on the outcome.

If a donor gets any kind of financial benefit, directly or indirectly, HMRC could treat the donation as ‘tainted.’

It means HMRC no longer sees the donation as genuinely charitable, so the donor could lose tax relief, and the charity could face compliance issues too.

3.2. Approved investments

Charities can invest money and still get tax relief, but only if they follow the rules. There are 12 types of approved charitable investments.

Since April 2026, instead of slightly different rules for each, they all have to meet one condition: the investment must benefit the charity, not help anyone avoid tax.

This change makes things clearer and closes loopholes in which investment structures might have been used primarily for tax advantages.

3.3. Attributable income

Another important change involves legacies – money left to charities in wills.

From April 2026, HMRC treats legacies as attributable income, which means charities must use that money for their charitable purposes. If they don’t, they could face a tax charge.

This brings legacies in line with how other types of income already work and ensures funds go where they’re supposed to: supporting the charity’s mission.

3 main benefits of MTD for charities

At first glance, MTD can feel like just another compliance burden. However, MTD brings multiple benefits that make financial life easier for charities.

Better financial transparency and real-time financial insights

With everything stored digitally, it’s much easier to see what’s going on financially.

Instead of waiting until the end of the quarter or year, you can see your financial position in real time.

You don’t have to go through spreadsheets or paper records to figure things out. You can quickly track income, spending, and VAT positions in one place.

That means you can:

• Spot issues earlier
• Manage cash flow more effectively
• Make informed decisions faster

Charities often work on a tight budget, so having up-to-date information can make a big difference.

Fewer errors through automation

Manual processes leave room for mistakes, especially when you copy numbers between systems.

MTD reduces that risk by automating most of the work. Once your systems are connected, data flows through automatically and minimises human error.

Stronger governance and trustee reporting

Trustees need clear, accurate financial information to make good decisions and stay on top of their responsibilities.

MTD makes reporting more consistent and reliable, with clear digital records to back everything up.

It also ensures that audits are smoother and reports are quicker to pull together.

Also, you can access up-to-date financial insights whenever you need them to plan fundraising or spending.

How to take the stress out of VAT with ANNA – for free

ANNA is an all-in-one business app that helps you easily register your business and stay on top of your finances.

Our solutions can send and chase invoices, handle your bookkeeping, and file your VAT, Corporation Tax, and MTD Self Assessment, all in one place.

With our tools and solutions, you can:

✨ Capture everything automatically: You can categorise and record expenses as you go to keep the clean digital records MTD requires.

✨ Stay on top of your taxes: You’ll get real-time estimates to show what you owe HMRC, so there are no surprises at VAT return time.

✨ Set money aside as you earn: You can benefit from smart tax pots that save a portion of income automatically, making VAT payments easier to manage.

✨ Keep invoicing simple and organised: You can easily create, send, and track invoices with automatic payment matching for accurate and up-to-date records.

✨ Work from one connected system: You’ll benefit from a built-in UK business account that keeps transactions, records, and reporting in sync, and supports MTD’s digital link rules.

✨ File VAT returns smoothly: You can leverage automated calculations and submissions to reduce manual work and errors and align with MTD requirements.

✨ Handle wider tax responsibilities: We provide company accounts, Corporation Tax, and MTD Income Tax reporting.

✨ Stick to deadlines: You’ll receive automated reminders to help you stay compliant and avoid penalty points.

Designed with business owners in mind, ANNA’s app means there’s no extensive setup and no need for manual logs or an accountant.

📢 File with ANNA for free

MTD for 2026/27 with ANNA is totally free, including four quarterly filings and one final update.

Curious to know more?

Sign up for ANNA today to keep your charity’s finances compliant and under control.

FAQ:

1. Do you have to declare charitable donations on Self Assessment?

Yes, if you’re claiming tax relief through Gift Aid, you’ll need to include your charitable donations on your Self Assessment tax return.

This allows HMRC to calculate any extra tax relief you’re entitled to. If you’re not claiming relief, you usually don’t need to declare them.

A quick tip: When you report your donation, use the amount you actually gave, not the extra amount the charity gets after claiming tax back.

2. How does MTD affect taxes?

MTD is HMRC’s way of moving the tax system online. Businesses and people must keep digital records and submit tax returns using compatible software.

This way, tax reporting is more accurate, efficient, and up to date.

3. Do charities need to keep all their records digitally for MTD?

You have to use compatible software so your income, expenses, and VAT data flow smoothly, and you can send it directly to HMRC.

It makes reporting easier and helps you avoid mistakes or penalties.