What impact does VAT have on charities

VAT & CHARITIES: CLARITY ON VAT REGULATIONS & OPPORTUNITIES

J L Grant & Co30 April 2014

VAT AND CHARITIES – A BRIEF OVERVIEW

• VAT as an expense • VAT registration for charities• VAT recovery• Imported services• The penalty regime

VAT AS AN EXPENSE

• Always buy without VAT rather than try to claim it back later

• Reduced-rating• Zero-rating• Business/non-business central issue

REDUCED RATED SUPPLIES

• Fuel and power– Non-business – 60% tolerance– Small consumption treated as domestic

ZERO-RATING TO CHARITIES

• Advertising

• Construction of new buildings or annexes

ZERO-RATED ADVERTISING

• Somebody else’s space or time• Must target general public• Design and production components of

qualifying advertising• Books, children’s clothes?

WHAT’S IN?

• Television & radio• Cinema• Billboards• Sides of vehicles• Newspapers and magazines• Third party websites• Pay per click sponsored links on search

engine websites

WHAT’S OUT?

• Direct mail and telesales• Own Christmas cards• Exhibition stands or space• Pens and adult clothing• Design of own website• Services of copywriters and designers for

search engine optimisation purposes• Components of the above

ZERO-RATED CONSTRUCTION FOR CHARITIES

• Buy freehold or long lease in new building• Buy construction services to create new

building• “Solely” for relevant charitable purpose• Annexes• Reliefs for listed buildings abolished• Dwellings, residential buildings

RELEVANT CHARITABLE PURPOSE

• For non-business purposes• For village halls • Part or whole of a building – solely

remains test• “Solely” allows for de minimis• Per HMRC de minimis not more than 5%• Certificate• 10 year review period

BUSINESS

• Provision of goods and/or services to third parties for consideration on an on-going basis

• Profit or motive immaterial (Fuchs)• Direct link• Means testing (Wakefield College)• Ignore internal transactions• Outsourcing local authorities and health

boards

HOW TO MEASURE 95%

• HMRC will not approve upfront• Accurate• Not unduly burdensome• Readily verifiable by HMRC• Possible approaches:

– Staff ratios– Commercial/total funding– Time– Floor areas

FLOOR AREA EXAMPLE 1FAILS 95% TEST

50% Non Business

25% Non Business

FLOOR AREA EXAMPLE 2PASSES 95% TEST

50% Non Business

25% Non Business

VILLAGE HALLS

• Reflects pressure from WI in late 1980s – difficult to sustain outside classic Home Counties model

• Per HMRC, how organised rather than type of activities

• Expect village hall committee and village hall trustees

VAT REGISTRATION AND CHARITIES

• Business?• Growth of outsourcing• Supplies taxable at standard, reduced or zero rate• Services imported for business purposes• Exemption from registration if all zero-rated (e.g.

sales of donated goods)• Exception from registration• Non-established persons – no threshold• Penalties

OUTSOURCED SERVICES – WHEN IS THE ACTIVITY BUSINESS?

• Wording of service level agreements (“SLAs”) unhelpful and not conclusive

• More likely non-business where:– Charity would have carried out the activity anyway– The charity applied for a grant– The SLA only stipulates “good housekeeping”

• More likely business where:– The public body would otherwise have had to provide

the service itself and so derives a direct benefit – There is negotiation on terms and conditions

CHARITIES AND VAT EXEMPT SUPPLIES

• Education and vocational training• Welfare services• Cultural services

CULTURAL SERVICES

• Public body or eligible body• Museum, gallery, art exhibition or zoo• Theatrical, musical or choreographic

performance of a cultural nature• What is an eligible body?• What is cultural?

WHAT IS AN ELIGIBLE BODY?

• Non-profit-distributing– Rules and practice– Cultural charities may still make grants or donations in

pursuit of their wider charitable objectives

• Ring-fenced profits– Used for continuance or improvement of the exempt cultural

facilities; or– Applied in connection with related cultural supplies (e.g.

research or conservation)

• Managed and administered on voluntary basis by persons with no direct or indirect financial interest in its activities

VOLUNTARY BASIS - 1

• Decision-making body of last resort (e.g. board)

• Not those who implement on daily basis• Actual not potential financial interest

– Payments above market rate or profit-related plus

– direct link between those payments and role in directing the body’s activities

VOLUNTARY BASIS - 2

• Trustee employed as orchestral player or theatre director could scupper exemption

• Bournemouth Symphony Orchestra not an eligible body because managing director with £80k salary was member of board

• Guarantor who can only make a loss has no financial interest (Longborough Festival Opera)

• Employee without voting rights not a problem

CULTURAL?

• Film?• Erotic Center BVBA v Belgium

– Reduced rate– Not a cinema

• British Film Institute– Imminent hearing by Upper Tribunal

GETTING VAT BACK

• Identify VAT that relates directly to– Non-business activities (disallow)– Taxable business supplies (claim)– Exempt business supplies (disallow unless de

minimis)

• Apportion VAT that relates both to business and non-business (BNB method)

• Apportion residual input tax (partial exemption method)

BNB AND PARTIAL EXEMPTION

• Must do BNB calculation first to identify input tax• May be on any fair and reasonable basis• Can ask for HMRC approval so long as you

make no exempt supplies• If BNB and partly exempt, HMRC can only

approve a “combined method”• Combined method means:

– Less calculations– Lose de minimis

PARTIAL EXEMPTION

• Standard method based on ratio of taxable to total turnover

• Anything else “special” and needs HMRC approval• Special methods may be based upon:

– Transaction numbers– Staff time– Inputs or input tax– Floor area– Cost centres– Management accounts

BNB/PARTIAL EXEMPTION – EXAMPLE 1

• Charity A has two main activities:– Taxable consultancy projects in its areas of expertise– Other activities in pursuit of its charitable objectives and

funded by grants and donations (non-business)

• Charity A must:– Identify VAT directly attributable to non-business

activities and disallow it– Identify input tax directly attributable to consultancy and

claim it– Apportion balance between business and non-business

• Can seek HMRC approval for its BNB method

BNB/PARTIAL EXEMPTION – EXAMPLE 2

• Charity B has three main activities:– Taxable consultancy projects in its areas of expertise– Exempt training courses– Grant-funded non-business activities

• Charity B must:– Identify VAT directly attributable to non-business activities and

disallow it– Identify input tax directly attributable to consultancy and claim it– Identify exempt input tax and disallow it; and

• Either:– Obtain HMRC approval for a combined method; or– Use a BNB method to identify input tax; and– Use standard or special method to apportion input tax

THEATRE PRODUCTION COSTS

• HMRC do not regard these as residual unless theatre has contracted to – Secure sponsorship for clearly defined run of

events or clearly defined period; or– Tour the production; or– Record for later sale on CD or similar

• Securing general corporate sponsorship or catering supplies insufficient

• Special method?

IMPORTED SERVICES – A WARNING

• Example: charity buys search engine optimisation services from a Dublin-based supplier

• Not zero-rated if bought in the UK because they relate to charity’s own website (own space and time)

• VAT treatment will depend upon – Whether charity is VAT-registered; and– Whether it buys the services for business

purposes

SERVICES IMPORTED BY A VAT-REGISTERED CHARITY

• Supplier will not charge VAT• Whether bought for business or otherwise• A VAT-registered charity will be treated as

supplying the services to itself• Charity must charge itself VAT in its return

(reverse charge)• No reclaim unless it relates to taxable

business activities

SERVICES IMPORTED BY A CHARITY NOT REGISTERED FOR VAT

• If charity buys for business purposes:– The supplier should not charge VAT but often

in practice they will – The cost of the services will count towards the

VAT registration threshold for the charity

• If charity buys for non-business purposes:– The supplier should charge VAT (in this

example Irish VAT)

PENALTIES FOR INACCURACIES

• Quality of disclosure –unprompted or prompted?

• No penalties if you show reasonable care• Careless, deliberate or deliberate and

concealed?• Range from 0% to 100%• Mitigation for telling, helping and giving

access

WHAT IS REASONABLE CARE?

• Different standards for multinational companies and sole traders

• Have you done research/sought professional advice in relation to unfamiliar transactions?

• Where do charities sit in the spectrum? (Bilal Jamia Mosque)

• Deliberate not same as dishonest• Level of care and prudence expected from

Trustees – risk of further repercussions

T: 07787 576783

E: thd@terrydockley.co.uk

W:www.terrydockley.co.uk

VAT AND CHARITIES – WHAT YOU NEED TO KNOW

These slides are intended for use in connection with the presentation given on 30 April 2014. No action should be taken on the basis of information contained in these slides or in the presentation without obtaining professional advice specific to the circumstances.

No responsibility for loss occasioned to any person acting or refraining from action as a result of the material in these slides or presentation can be accepted by the speaker or by Terry Dockley & Co Limited.

Copyright 2014, Terry Dockley & Co Limited