VAT126 for Parish Councils: Reclaiming VAT

Most parish councils are not registered for VAT, and most parish councils reclaim VAT anyway. That sounds like a contradiction and it is not: local authorities sit in a special statutory scheme that lets them recover the VAT they pay on their non-business activities without ever filing a VAT return. The mechanism is section 33 of the VAT Act 1994, and the claim form is the VAT126.

The scheme is generous, and the rules around its edges catch councils out with some regularity. This guide covers where the entitlement comes from, the line between business and non-business that decides every claim, the three traps that cost councils money or produce a wrong claim, and the mechanics of filing.

Why a parish council can reclaim VAT without being registered

The ordinary rule is that only a VAT-registered business recovers VAT, and only against the VAT it charges. Section 33 creates an exception for public bodies. Section 33(1) of the Value Added Tax Act 1994 provides that where VAT is chargeable on a supply to a body to which the section applies, and

"(b) the supply ... or importation is not for the purpose of any business carried on by the body, the Commissioners shall, on a claim made by the body at such time and in such form and manner as the Commissioners may determine, refund to it the amount of the VAT so chargeable."

(The ellipsis marks words repealed by a later amendment, as shown on legislation.gov.uk.)

Two things in that sentence do the work. "Not for the purpose of any business" is the test — the whole of the rest of this guide follows from it. And "shall... refund" is an entitlement, not a discretion: if the conditions are met, HMRC must pay.

Section 33(3) then lists the bodies the section applies to, and the list opens with the one that matters here — "The bodies to which this section applies are— (a) a local authority". Section 96(4) defines that term:

"In this Act “local authority” means the council of a county, ... district, London borough, parish or group of parishes (or, in Wales, community or group of communities), the Common Council of the City of London, the Council of the Isles of Scilly, and any joint committee or joint board established by two or more of the foregoing"

(The ellipsis marks "county borough," which legislation.gov.uk shows as a later insertion. VAT Notice 749 paragraph 3.3 restates the same list in plain form.)

A parish council is therefore a section 33 body by name, on the face of the Act. So is a group parish council, and so is a Welsh community council. No application is needed and no threshold has to be crossed.

Trap 1: a parish meeting is not a section 33 body

The smallest parishes have no council — they are governed by a parish meeting instead. HMRC's VAT Notice 749 closes off any doubt about what that means, at paragraph 4.2:

"For the avoidance of doubt, these bodies do not include a:

• joint board or joint committee set up by bodies other than local authorities
• body that merely obtains financial help from local authorities
• purely advisory committee that does not carry out local authority functions
• Community Council in England or Scotland
• Community Association
• parish meeting
• parochial church council
• village hall management committee
• charity"

Three entries on that list are worth reading twice. A parish meeting cannot use section 33. A parochial church council — the PCC, a church body that shares an abbreviation and often a village with the civil parish — cannot either. Neither can a village hall management committee, which matters because village hall projects are one of the commonest things a parish council gets involved in. See trap 3.

Note also that a "Community Council in England" is excluded while a Welsh community council is inside the section 96(4) definition. The two use the same words for different things.

The line that decides every claim: business or non-business

Section 33 refunds VAT on what the council does that is not business. Everything turns on which side of that line an item of expenditure falls, and Notice 749 paragraph 2.2 sets out the test:

"Business activities:

• are mainly concerned with making supplies to other persons, for any form of payment or ‘consideration’, whether in money or otherwise
• have a degree of frequency and scale
• continue over a period of time
• are within the scope of VAT and may be standard-rated, zero-rated or exempt"

while non-business activities are

"- activities you carry out for no charge and no other form of consideration, including leases you grant, or the freehold sale of land and buildings, for the nominal payment of a peppercorn or a pound and where no other form of payment is involved

• activities you carry out for academies or multi-academy trusts in relation to travel for training, childcare vouchers and school trips
• activities you carry out for a charge but with no degree of frequency or scale, and without continuing over any period of time
• outside the scope of VAT"

The fourth business bullet is the one to hold on to: "within the scope of VAT" is not the same as "standard-rated". A business activity can be exempt or zero-rated and still be a business activity, which is what the next section turns on.

For a typical parish council, the non-business side is most of what it does: running the council itself, maintaining open spaces and play areas that anyone can use for free, street lighting, grass cutting, the noticeboard, the clerk's office costs, professional fees, insurance, audit. All of it is done under statutory functions and none of it is sold to anyone. VAT on those costs is recoverable in full.

The business side is anything the council charges for on a recurring basis. The commonest examples in a parish are hall or pavilion hire, allotment rents, advertising space in a newsletter, and burial and memorial fees. Those are business supplies — but "business" does not automatically mean "standard-rated", and the distinction matters for what you do next:

• Letting land and buildings is ordinarily an exempt supply. Schedule 9, Group 1, item 1 to the Act exempts "The grant of any interest in or right over land or of any licence to occupy land", subject to the exclusions listed under that item. Hall hire and allotment rents usually sit here.
• Burial fees are exempt too. Schedule 9, Group 8 exempts "The disposal of the remains of the dead" and "The making of arrangements for or in connection with the disposal of the remains of the dead".

This matters because exempt business activity does not knock a council out of section 33 altogether. Notice 749 paragraph 7.2 explains the statutory basis — "Section 33(2) of the VAT Act 1994 allows local authorities to recover VAT attributable to exempt supplies so long as the amount involved is insignificant" — and then puts figures on "insignificant":

"VAT attributable to exempt activities is insignificant only if it amounts to less than one of the following:

• £7,500 per annum
• 5% of the total VAT incurred on all purchases in a year"

Two details in that paragraph are easy to miss. Only one of the two conditions has to be met, not both. And the year for this purpose is fixed: "A year for section 33 bodies runs from 1 April to 31 March, even if they utilise special VAT periods" — which happens to align with the council's own financial year.

Most parish councils are nowhere near either figure and can ignore the point. A council running a cemetery and a hired-out hall should check it rather than assume.

Trap 2: there is no £90,000 registration threshold for a council

This is the one that surprises clerks, because every other organisation they deal with works to the registration threshold. Notice 749 paragraph 3.2:

"Local authorities are required to register for VAT if they make any taxable supplies, whatever the value of those supplies is. But for ease of administration HMRC's practice is to only enforce this where it's anticipated that output tax will reach £1,000 a year."

Read that carefully, because two different things are being said. The legal position is that a local authority making any taxable business supply must register, with no de minimis at all. The practical position is an administrative concession pitched at £1,000 of output tax a year — roughly £5,000 of standard-rated income.

So a council that starts charging for something standard-rated — selling advertising, hiring out a marquee, charging for a service that is neither land nor burial — can cross into a registration obligation at a level of turnover that would be trivially below the threshold for a business. If that is where the council is heading, take advice before the income starts rather than after. A registered council does not lose section 33; it reclaims non-business VAT on the return instead of on a VAT126.

Trap 3: buying on behalf of a community group is a business supply

This is the expensive one, and it arises precisely because parish councils are helpful.

A village group raises money for a new playground, a defibrillator, or a hall refurbishment. The group is not VAT registered and cannot recover VAT. Someone suggests the council buys the equipment instead, because the council can reclaim the VAT. The group hands over its funds, the council places the order, and everyone believes 20% has been saved.

HMRC's guidance in the VAT Government and Public Bodies manual at VATGPB4440 addresses this directly, and the answer depends on whose money it is:

"A parish council, or other local authority, may make purchases out of its own funds, including grants it has been awarded, which it then gives away for no charge. This is a non-business activity of the council and so it will be entitled to recover the VAT incurred under section 33."

But:

"However, grants awarded to a voluntary group, rather than to the council, represent the group's own funds. Consequently, if those funds are passed to the council to purchase goods or services for the voluntary group, they represent consideration for a supply by the council to the voluntary group. This is a business activity by the council and so the normal VAT rules apply."

The distinction is ownership of the money, not who signs the order. If the grant was awarded to the council, the council spends its own funds and recovers the VAT. If the grant was awarded to the group and then passed through, the council is making a taxable supply to the group — which is both irrecoverable under section 33 and, as trap 2 explains, output tax the council may have to account for.

The practical fix is to get the ownership right at the start: have the funder award the grant to the council, have the council resolve to take the project on as its own, and have the asset end up on the council's asset register. A council that does that is not dodging anything — it genuinely owns the project. A council that takes a cheque from a committee and buys what the committee asks for does not, whatever the minute says.

Making the claim: form VAT126

For a council that is not VAT registered, the claim is made on form VAT126 — HMRC's "Claim a VAT refund as an organisation not registered for VAT" service. It can be completed online, or filled in and posted.

The period rules are specific, and they are the thing clerks most often get wrong. Your claim must:

"be for a period of at least one calendar month and must end on the last day of a calendar month

cover a period of at least 12 months if you want to make a claim for less than £100

be made within 4 years of the end of the month in which the supply, acquisition or importation occurred"

In practice that means:

• Claim on a cycle that suits the council, but always to a month end. Quarterly is common and lines up with budget monitoring; some councils claim annually as part of year-end. There is no maximum frequency — a claim covering a single month is valid.
• Below £100, you must wait. A claim for less than £100 has to cover at least twelve months, so a council with very little recoverable VAT claims once a year by necessity, not by choice.
• Four years is the backstop. A council that has never claimed, or that finds a period was missed, can still go back four years from the end of the month in which the supply was received. This is worth checking on a change of clerk — an unclaimed period is real money and the window is finite.

Each invoice on the claim needs its date, the supplier's VAT registration number, the VAT amount, the name of the council receiving the supply, and a description of what was bought. Claims covering six or more invoices go in as a single spreadsheet upload rather than line by line. A first claim also needs a recent bank statement, as do claims where the council's address or bank details have changed.

And the records have to survive the claim:

"You must keep invoices and other records to support your claims for 6 years, unless we agree in writing to a shorter period."

Six years, not four — so the retention obligation outlasts the claim window.

Where VAT sits in the council's year

VAT reclaim is not a standalone task; it is a thread running through the financial year. The financial regulations should say who prepares and authorises the claim and on what cycle, in the same way they set out payment authorisation. The AGAR preparation checklist carries "VAT reclaims submitted" as a year-end item, because an outstanding reclaim is a debtor that has to be reflected in the accounting statements. And any project the council funds from section 137 or another spending power should have its VAT position settled before the order is placed, not after the invoice lands.

If the council is reviewing its financial controls anyway, the compliance checklist tool includes VAT reclaim alongside the other annual financial obligations, so the cycle is recorded rather than remembered.

Sources

• Value Added Tax Act 1994, section 33 — refunds of VAT in certain cases (section 33(1) refund entitlement; section 33(3)(a) local authorities)
• Value Added Tax Act 1994, section 96(4) — definition of "local authority" (includes a parish or group of parishes)
• Value Added Tax Act 1994, Schedule 9 — exemptions (Group 1 land; Group 8 burial and cremation)
• VAT Notice 749: local authorities and similar bodies (paragraph 2.2 business/non-business; 3.2 registration; 4.2 bodies excluded; 7.2 insignificance limits)
• GOV.UK — Claim a VAT refund as an organisation not registered for VAT (form VAT126: claim periods, £100 rule, 4-year limit, 6-year records)
• HMRC VAT Government and Public Bodies manual, VATGPB4440 — section 33 bodies: recoverable VAT: community projects
• HMRC VAT Burial and Cremation manual, VBURC2200 — the law (Schedule 9 Group 8 items 1 and 2)

This article is for general guidance only and does not constitute tax advice. VAT liability depends on the specific facts of each supply, and a council with significant business income — a cemetery, a hired-out hall, or advertising revenue — should take advice from its county association or an accountant with section 33 experience before relying on any general position set out here.