August 13, 2021

Article

Managing your charity’s VAT

Recent research undertaken for the Charity Tax Group estimated that: -

  • charities lose £1.8 billion per year by being unable to recover all of the VAT on the goods and services they buy
  • a significant proportion of the £1.7 billion output VAT charged by charities each year is absorbed by charities rather than being passed on to their ‘customers’ and therefore is a burden on the charity sector
  • VAT reliefs on purchases by charities are estimated to be worth £1.0 billion annually for the sector

A suggested 3 step plan for Charity Finance Teams

Step 1- Overview, or, “Three key themes to consider”

  • Optimal VAT treatment of income

Establishing the correct VAT treatment of charitable income is complex, and there can be significant costs if the wrong treatment is applied.

If VAT is not charged when it should be, HMRC has the power to demand the tax legally due, whether or not it can be recovered from the customer. Conversely, if VAT is charged when it should not be, the charity could be losing 1/6th of the relevant income (where VAT is charged at 20%.)

Some services provided by charities, e.g. education or welfare, can be exempt from VAT. However, exemptions from VAT are subject to strict criteria, and if the conditions are not met the income will be subject to VAT. For example, income from educational, welfare, cultural, or sporting services can sometimes be exempt if provided by a charity but exemption could be lost if the activity is performed by the charity’s trading subsidiary.

Further, being able to exempt charges is helpful if the payer cannot reclaim VAT charged to it, but may mean that the charity cannot claim VAT on its own costs referable to that income.

VAT is not, generally, recoverable on expenditure referable to exempt income, or in relation to non-business activities. However, certain charities, in particular Academy schools, are entitled to recover VAT on non-business activities.

In some circumstances, therefore, being able to charge VAT to, e.g. a corporate sponsor or a local authority, can prove beneficial.

  • Charitable expenditure

There are some specific reliefs from VAT for certain charitable expenditure. Typically, these are subject to detailed criteria, and ensuring the charity qualifies can make a big difference to budgets. Further, Trustees do, of course, have a duty to ensure the charity receives tax reliefs to which it is entitled.

Charities that receive VAT exempt income, or have non-business activities, are usually required to apportion the VAT they incur on expenditure. (Certain charities, for example, Academy schools, have more favourable regimes.)

Where apportionment is required, the “gold standard” is to have a methodology that:-

  • Is acceptable to HMRC;
  • gives a helpful result; and
  • is simple and robust to operate
  • Compliance

Charities often have a particularly complicated VAT position and face the challenge of meeting their VAT obligations, and exercising their entitlements, in an efficient, cost-effective way.

Errors in VAT returns, or non-compliance with VAT requirements may incur HMRC penalties.

Step 2-Identify Risk/opportunity, or “10 Key VAT questions Charity FD’s and Finance Managers should be regularly considering”

  1. If my charity, and/or any trading subsidiaries, are not registered for VAT, am I confident that this is correct?
  2. Have I taken into account any recharges between the charity and subsidiaries, and should we be considering a VAT group?
  3. Do I know how much irrecoverable VAT the charity suffers on expenditure?
  4. Have I analysed the reasons for this?
  5. Are we taking advantage of any available reliefs and exemptions for income and expenditure?
  6. Have we taken into account that some VAT reliefs may apply to the charity, but not the subsidiary?
  7. Am I confident that I understand the logic and assumptions underpinning any apportionments of VAT on either income or expenditure?
  8. Am I confident that any such apportionments are still “fit for purpose”?
  9. Do we have an internal “VAT manual and procedures guide”?
    1. Is it up to date?
    2. How do we keep up to date with changes in VAT legislation and caselaw?
  10. Have I considered the impact of VAT on: -
    1. any changes to our operations; or
    2. any planned capital expenditure?

Step 3- manage Risk, or “Commission external help if necessary”

Albert Goodman can provide VAT advice and assistance tailored to your needs, for example:-

  • A “healthcheck” of your VAT affairs
  • Specific advice on the correct treatment of a charity’s income and the VAT registration and VAT recovery, consequences
  • Advice on the scope for restructuring a grant, or VAT exempt income stream, into VAT-able income, for example where the payer is a commercial partner, or a Local Authority
  • Advice on planned capital expenditure, in particular where the charity is buying/selling/ or redeveloping its buildings
  • Identifying, negotiating with HMRC, and implementing, a suitable Partial Exemption or Business/Non-Business methodology to provide a “fair and reasonable” recovery of VAT on expenditure
  • If you are a charity subject to a special VAT regime, for example an Academy, or Palliative Care charity, we can help optimise claims for recoverable VAT, and advise on whether VAT registration is necessary or desirable.

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