VAT and Tax: Five key issues for Hospices

Hospice charities continue to operate under significant financial pressure, including rising clinical costs, increasing complexity of care delivery, and greater dependence on voluntary income. At the same time, the tax and VAT regime for hospices can be complex, and hospice activities may fall into areas where tax exemptions depend on careful structuring and documentation.

This article highlights five key tax and VAT risks and opportunities that are particularly relevant for hospices.

1. Corporation Tax on income

Most hospices have charitable status and benefit from wide-ranging exemptions for income applied for charitable purposes. However, not all income streams automatically qualify. Activities that fall outside the hospice’s charitable objects may constitute non-primary purpose trading that can give rise to direct tax costs unless planned appropriately.

Examples of potentially non-exempt income streams include:

• Income from hiring out meeting rooms, training spaces, or catering facilities might not fall within the hospice’s charitable purposes unless the activity directly supports, or is ancillary to, the charity’s primary purpose.
• Consultancy or training provided to organisations outside the hospice’s charitable remit, particularly if the hospice’s governing document focuses narrowly on palliative or end-of-life care, may be considered non-primary purpose trading.
• Support services such as IT, HR, payroll, or administrative activities provided to other charities or hospices may fall outside the primary purpose exemption unless the service directly advances the hospice’s own objects.
• Property disposals – While most disposals of property are tax exempt, significant pre‑sale development or disposals under overage arrangements with developers could be treated as trading profits, which could be taxable.

It is also worth noting that many direct tax exemptions have different conditions to VAT exemptions, so it cannot be assumed that an exemption met for one tax is met for all taxes.

2. Gift Aid

Gift Aid increases eligible donations from UK taxpayer individuals by 25% and remains one of the most important sources of tax-efficient income for hospices. Ensuring compliance is essential both to maximise claims and reduce risk.

Hospices should ensure:

• Gift Aid declarations are correctly worded, valid and retained according to record-keeping guidelines.
• Digital declarations (whether directly to the charity or through third-party platforms) are backed up by an appropriate audit trail.
• Donor communications and incentives, especially where benefits may be provided, do not inadvertently invalidate Gift Aid by exceeding the benefit limits.

Many hospice charities operate retail shops selling donated and/or bought in goods. Charities should ensure that the retail Gift Aid scheme is operated correctly and kept up to date, as regulations and paperwork requirements are often updated. Where a hospice operates the retail gift aid scheme, it is important that a charge is made to the donor for selling the donated goods; this charge is subject to VAT but protects the VAT recovery on retail shop costs.

Additionally, charities using (or that could be using) a subsidiary company in the process of maintaining charity shops should ensure that the arrangements between the charity and subsidiary are optimal and compliant, as this can affect various taxes, including Gift Aid, VAT, direct tax and business rates relief.

For further information, visit our Charity Gift Aid Hub.

3. Fundraising

Fundraising remains core to hospice income, but the tax and VAT position can be complex, particularly where events, sponsorship or commercial partnerships are involved.

There is a wide range of issues to consider, including:

• Income from fundraising events is often exempt from VAT and direct tax, but this depends on several factors and has recently been tested in the Yorkshire Agricultural Society case. Read our insight on VAT ruling broadens the scope for fundraising event exemptions for more information.
• Gift aid can often be claimed in error on fundraising income that is not donation income, for example, tickets to fundraising events or raffles.
• With sponsorship agreements, several factors can affect the tax and VAT treatment, such as whether the sponsorship relates to a fundraising event, what commercial benefits the sponsor receives and whether the sponsorship is within the hospice’s primary purpose or not.
• Where a hospice promotes an adventure challenge event, the charity should be aware of any costs that are paid out of the fundraising donations (for example, if the charity pays for a participant’s entry to a marathon), as this can affect gift aid eligibility. Additionally, any charge the hospice makes to a participant for event entry is likely subject to VAT.

4. Building projects

Capital development projects are often expensive, and the VAT rules can be complex, so it is important to take VAT advice early.

Zero-rate VAT relief may be available for the construction of new buildings, which can improve cash flow and often reduces the total VAT cost of a project. Where VAT is applicable, there are often complications around how much can be recovered by the hospice charity, so when budgeting, it should not be assumed that the VAT can be recovered in full.

Changes in the use of buildings can affect the amount of VAT recoverable in the ten years after first use.  Furthermore, a change of use can also create VAT charges where the zero-rate of VAT applies. Where the cost of any capital building project exceeds the Capital Goods Scheme (currently £250,000 plus VAT, but we expect this to increase to £600,000 under proposed changes), the building's use needs to be monitored over a ten-year period.  Where there is a change in use (such as external lettings) during this period, an adjustment to the initial VAT reclaim is required to be made by the hospice.

5. Investments

Hospices may hold investment portfolios to support long-term financial stability. Under current rules, most conventional investments qualify automatically as approved charitable investments, and investment income and gains are exempt if applied for charitable purposes.

From April 2026, the test for an approved charitable investment will change. Charities (including hospices) will need to demonstrate that each investment is held for the sole benefit of the charity. Hospices should review their investment policies to ensure there is sufficient evidence of decision-making in line with the expectations set out in HMRC guidelines. Failure to demonstrate that an investment is held for the hospice’s benefit could result in a tax exposure on the charity’s income. 

For more information, please contact your usual Crowe contact.