Category Archives: Charities

VAT – Latest from the courts: Craft fair pitches standard rated

By Marcus Ward 17 October 2016

The Upper Tribunal (UT) case of Zombory-Moldovan (trading as Craft Carnival)

Background

In the past, the rent of stall at craft fairs have generally been treated as an exempt right over land. In fact, in this instant case, the First Tier Tribunal agreed with the appellant that supplies made to stallholders to sell their goods were the equivalent to a right to occupy land and therefore exempt from VAT.

However, in this decision, the UT overturned this analysis and found that the supply was standard rated.

Decision

The reasons given were that what Craft Carnival supplied went beyond the mere use of a plot of land for a specific period and amounted to the use of a pitch at an event in order to “offer certain goods for sale”. The test in the previous “Temco” case on this point stated that an exempt supply amounts to a “relatively passive activity linked simply to the passage of time and not generating any significant added value”. Craft Carnivals had “very real and significant responsibilities beyond the bare provision of an appropriately-sized plot”. This, being a single supply (it was decided) meant that the entire charge was subject to VAT at the standard rate.

The appellant’s website stated that “In addition to the erection of marquees, which are hired for the duration of a fair, Mrs Zombory-Moldovan arranges for the provision 45 of other necessary temporary facilities including portable toilets, electrical generators and security fencing. She also employs between five and seven members of staff to act as ticket sellers and car park 3 marshals. Before the fair takes place Mrs Zombory-Moldovan would have issued a press release and advertised the event in local newspapers and on Craft Carnival’s website and booked a children’s entertainer, such as a magician, to encourage families to attend.”

Impact

Any business or charity which provides similar supplies must review their VAT responsibilities in light of this decision immediately. This case is likely have far-reaching implications for both organisers and those businesses which sell goods in fairs and similar events. This may encompass; trade fairs, exhibitions and even, possibly, high end car-boot sales type events. We await HMRC’s response to their victory in this case and how wide-ranging they consider the decision to be.

Please contact us if this decision affects your or your client’s businesses.

VAT Latest from the courts – what is an economic activity by a charity?

By Marcus Ward 5 September 2016

In the VAT case of Longridge on the Thames (Longbridge) here the Court of Appeal considered previous decisions at the First Tier Tribunal (FTT) and Upper Tribunal (UT) on whether Longbridge carried on an economic activity. This is an important case as it goes some way in determining the meaning of “business” in light of the term “economic activity” used in EC legislation. The term “business” is only used in UK legislation, The Principal VAT Directive refers to “economic activity” rather than business, and since UK domestic legislation must conform to the Directive both terms must be seen as having the same meaning. Since the very first days of VAT there have been disagreements over what constitutes a “business”. I have previously commented on this matter here

Background

Longbridge is a charity. It uses volunteers to provide boating activities (mainly to young people) on the Thames. The fees charged by Longbridge were often at below cost and the charity relied on donations to continue its operations. It constructed a new building and sought VAT zero rating of these costs on the basis that the building was to be used for non-business purposes. Consequently, it was crucial to the relief claimed that the charity was not carrying out a business in VAT terms. The FTT and the UT found that the charity’s “predominant concern” was not to make supplies for a consideration and therefore it was not in business. These findings were based on long standing case law, the most salient being; Lord Fisher and Morrison’s Academy Boarding Houses Association. Lord Fisher set out a series of tests which HMRC rely on to determine whether a business exists – considered here and here

Decision

The Court of Appeal allowed HMRC’s appeal. It decided that Longridge was carrying on an economic activity and therefore the construction of the new building could not be zero rated. The decision is worth considering in full, however, the court held that there was a “direct link” between the fees paid and service the recipients received, even if it was subsidised in certain instances and that Longbridge was furthering its charitable objectives. The requirement for a direct link was clearly demonstrated in The Apple and Pear Development Council case. The establishment of the direct link meant that Longridge was carrying in business (in UK law).

Commentary

The important test for whether an economic activity is being carried on is now; the direct link between payment and service. There is no longer the requirement to consider the test of “predominant concern” and in fact it was stated in the decision by the judges that this test is “unhelpful and may be misleading.” We must now ignore; the motive of the provider of the service, its status as a charity, the amount charged, whether subsidies are received by the charity, and whether volunteers are involved in the relevant activities.

This is a very big change in the analysis of whether a business exists and basically means that previous cases on this matter were wrongly decided. It brings the UK into line with the EC on the definition of an economic activity and therefore provides clarity on this matter – which has long been an area which has desperately required it.

It means that, unless the decision is reversed at the Supreme Court, we say goodbye to the unloved Lord Fisher tests. However, this may be very bad news for charities and not for profit entities that have relied on these tests to avoid VAT registration and charging VAT on their supplies. It is likely that many more charities will be dragged into the VAT net. It remains to be seen whether this case will trigger a renewed targeting effort on charities by HMRC, but what is clear is that charities need to be conscious of this new turn of events and consider their position. We strongly recommend that any bodies which have had previous discussions with HMRC on this point and any entity which is affected by this decision take professional advice immediately.

VAT – Charities and donations. Latest from the courts

By Marcus Ward 22 June 2016

What is a donation?

In the widely anticipated case of Friends of the Earth Trust Ltd (TC05165) the issue was; what constitutes a donation for VAT purposes? This is a perpetually thorny issue for charities.

True donations are outside the scope of VAT which usually produces a beneficial outcome for charities as no output tax is due on these payments. However, if any consideration is provided by a charity then it is likely that a taxable supply is being made. This subject often creates disputes and is another difficult area with which charities and NFP bodies have to contend.

This case is slightly unusual as the appellant was arguing that payments received from the public are taxable supplies.

Background

The charity incurred input tax on the expenses of training of street fundraisers (chuggers) who were used to sign up members of the public to a commitment to make regular direct debit payments to the charity. I am sure we have all encountered this type of fundraising.

The recovery of this input tax was dependent on whether the money collected in this way represented taxable supplies made by the charity, or were simply donations. If it was non-business income (donations) it was not possible to recover the relevant input tax.

Contentions on the consideration point

Supporters of the charity who paid £3 or more per month received a magazine and various other benefits. Those paying less than £3 received no benefits.

The charity contended that taxable supplies were being made, albeit that the supply was wholly or overwhelmingly zero rated (the supply of printed matter). Further, there was a direct and immediate link between the expenditure on the training of the fundraisers and the benefits obtained (by a certain class of supporter). This would mean that there would be no output tax on the payments, but recovery of the relevant input tax.

HMRC formed the view that the direct debit payments were donations and as a result a non-business activity such that the attributable input tax was irrecoverable.

The Decision

The Tribunal, citing, inter alia, the FTT’s decision in The Serpentine Trust Ltd v The Commrs for Revenue and Customs, decided that “..it is quite clear when viewed objectively that the £3 minimum monthly payment was not “for” the magazine and benefits, or in other words a quid pro quo for them. The magazine and benefits were quid cum quo, the transaction being that the payment was a gift to the appellant to be used in its charitable work and that the appellant would send the supporter free copies…”.

The Chairman stated that the evidence, when viewed in the round, is simply not consistent with the transaction objectively being one where the person was paying a subscription for the magazine and other benefits. And that it was a donation to support the appellant’s charitable activities. The fact that the taxpayer only provided the benefits if the minimum payment of £3 was made did not turn the payment into value given in return for the magazine and other benefits. It still retained its character as a donation. It was just as consistent with the transaction being one whereby the taxpayer undertook to send a free copy of the magazine where donations were made above a certain level.

The Tribunal therefore concluded that the payments were donations to the taxpayer and so the relevant input tax on the fundraising costs was not claimable.

This case demonstrates the uncertainty over the distinction between taxable supplies and donations and that every case is decided on precise facts. Please contact us if this has rung any alarm bells, or perhaps provided an opportunity to review a charity or NFP body’s income. Our charity services here

VAT Latest from the courts – what is a business?

By Marcus Ward 8 June 2016

In the CJEU case of * * takes a deep breath * * Lajvér Meliorációs Nonprofit Kft. and Lajvér Csapadékvízrendezési Nonprofit Kft the court considered whether these Not For Profit companies were making taxable supplies (economic activity). This then dictated whether input tax incurred by them was recoverable.

As a starting point, it may be helpful to look at what the words “economic activity”, “business”, “taxable supplies” and “taxable person” mean: The term “business” is only used in UK legislation, The Principal VAT Directive refers to “economic activity” rather than business and since UK domestic legislation must conform to the Directive both terms must be seen as having the same meaning. Since the very first days of VAT there have been disagreements over what constitutes a “business”. I have only recently ended a dispute over this definition for a (as it turns out) very happy client. In the UK the tests were set out as long ago as 1981 and may be summarised as follows:

Is the activity a serious undertaking earnestly pursued?
Is the activity an occupation or function, which is actively pursued with reasonable or recognisable continuity?
Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made (bearing in mind that exempt supplies can also be business)?
Is the activity conducted in a regular manner and on sound and recognised business principles?
Is the activity predominately concerned with the making of taxable supplies for a consideration?
Are the taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?

If there is no business, an entity cannot be making taxable supplies.

In EC Legislation, Article 9(1) of Directive 2006/112 provides: that “a ‘Taxable person’ shall mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity.”

The case

The case involved the Not For Profit companies constructing and operating a water disposal system. When complete, it was intended to charge a “modest” fee to users of the system. The companies engaged in economic activities that were not intended to make a profit and only engaged in a commercial activity on an ancillary basis.

The majority of the funding for the work was provided by State (Hungarian) and EC aid. The Hungarian authority formed the view that, because a nominal fee was charged this did not amount to an economic activity and so there was no right to deduct input tax incurred on the costs of getting the system operational. The CJEU went straight to judgement and decided that the construction and operation of the system could rightly be regarded as an economic activity and found for the taxpayer. It also provided a very helpful and clear summary in respect of “business” by commenting that “… the fact that the price paid for an economic transaction is higher or lower than the cost price, and, therefore, higher or lower than the open market value, is irrelevant for the purpose of establishing whether it was a transaction effected for consideration …”.

NB: The one area that the CJEU did refer back to the National Court however, was whether the transaction at issue in the case was a wholly artificial arrangement which did not reflect economic reality and was set up with the sole aim of obtaining a tax advantage.

It is interesting to compare this finding with the UK case law above, especially the points concerning “a certain measure of substance in terms of the quarterly or annual value of taxable supplies made” and “sound and recognised business principles”. I strongly suspect that what constitutes a business will continue to occupy advisers and HMRC and throw up disputes until the end of time (and/or the end of VAT….).

Full case here

What VAT CAN’T you claim?

By Marcus Ward 2 March 2016

The majority of input tax incurred by most VAT registered businesses may be recovered. However, there is some input tax that may not be. I thought it would be helpful if I pulled together all of these categories in one place:

Blocked VAT Claims

A brief overview

No supporting evidence

In most cases this evidence will be an invoice (or as the rules state “a proper tax invoice)” although it may be import, self-billing or other documentation in specific circumstances. A claim is invalid without the correct paperwork. HMRC may accept alternative evidence, however, they are not duty bound to do so (and rarely do). So ensure that you always obtain and retain the correct documentation.

Incorrect supporting evidence

Usually this is an invalid invoice, or using a delivery note/statement/pro forma in place of a proper tax invoice. To support a claim an invoice must show all the information set out in the legislation. HMRC are within their rights to disallow a claim if any of the details are missing. A full guide is here: https://www.marcusward.co/vat-invoices-a-full-guide/

Input tax relating to exempt supplies

Broadly speaking, if a business incurs VAT in respect of exempt supplies it cannot recover it. If a business makes only exempt supplies it cannot even register for VAT. There is a certain easement called de minimis which provide for recovery if the input tax is below certain prescribed limits. Input tax which relates to both exempt and taxable activities must be apportioned. More details of partial exemption may be found here: https://www.marcusward.co/wp-content/uploads/2014/03/Partial-Exemption-Guide.pdf

Input tax relating to non-business activities

If a charity or NFP entity incurs input tax in connection with non-business activities this cannot be recovered and there is no de minimis relief. Input tax which relates to both business and non-business activities must be apportioned. Business versus non-business apportionment must be carried out first and then any partial exemption calculation for the business element if appropriate. More details here: https://www.marcusward.co/wp-content/uploads/2014/03/Charities-and-Not-For-Profit-Entities-A-Brief-VAT-Guide.pdf

Time barred

If input tax is not reclaimed within four years of it being incurred, the capping provisions apply and any claim will be rejected by HMRC.

VAT incurred on business entertainment

This is always irrecoverable unless the client or customer being entertained belongs overseas. The input tax incurred on staff entertainment costs is however recoverable.

Car purchase

In most cases the VAT incurred on the purchase of a car is blocked. The only exceptions are for when the car; is part of the stock in trade of a motor manufacturer or dealer, or is used primarily for the purposes of taxi hire; self-drive hire or driving instruction; or is used exclusively for a business purpose and is not made available for private use. This last category is notoriously difficult to prove to HMRC and the evidence to support this must be very good.

Car leasing

If a business leases a car for business purposes it will normally be unable to recover 50% of the VAT charged. The 50% block is to cover the private use of the car.

A business using certain schemes

For instance, a business using the Flat rate Scheme cannot recover input tax except for certain large capital purchases, also there are certain blocks for recovery on TOMS users

VAT charged in error

Even if you obtain an invoice purporting to show a VAT amount, this cannot be recovered if the VAT was charged in error; either completely inappropriately or at the wrong rate. A business’ recourse is with the supplier and not HMRC.

Goods and services not used for your business

Even if a business has an invoice addressed to it and the services or goods are paid for by the business, the input tax on the purchase is blocked if the supply is not for business use. This may be because the purchase is for personal use, or by anther business or for purposes not related to the business.

VAT paid on goods and services obtained before VAT registration

This is not input tax and therefore is not claimable. However, there are exceptions for goods on hand at registration and services received within six months of registration if certain conditions are met.

VAT incurred by property developers

Input tax incurred on certain articles that are installed in buildings which are sold or leased at the zero rate is blocked.

Second hand goods

Goods sold to you under one of the VAT second-hand schemes will not show a separate VAT charge and no input tax is recoverable on these goods.

Transfer of a going concern (TOGC)

Assets of a business transferred to you as a going concern are not deemed to be a supply for VAT purposes and consequently, there is no VAT chargeable and therefore no input tax to recover.

Disbursements

A business cannot reclaim VAT when it pays for goods or services to be supplied directly to its client. However, in this situation the VAT may be claimable by the client if they are VAT registered. For more on disbursements see here: https://www.marcusward.co/disbursements-vat/

VAT incurred overseas

A business cannot reclaim VAT charged on goods or services that it has bought from suppliers in other EC States. Only UK VAT may be claimed on a UK VAT return. There is however, a mechanism available to claim this VAT back from the relevant VAT body in those States. However, in most cases, supplies received from overseas suppliers are VAT free, so it is usually worth checking whether any VAT has been charged correctly.

Input tax incurred on expenditure is one of the most complex areas of VAT. It also represents the biggest VAT cost to a business if VAT falls to be irrecoverable. It is almost always worthwhile reviewing what VAT is being reclaimed. Claim too much and there could well be penalties and interest, and of course, if a business is not claiming as much input tax as it could, this represents a straightforward cost.

VAT – Zero rating of charitable building; latest from the courts

By Marcus Ward 25 January 2016

A recent case at the Upper Tribunal (UT): Wakefield College here considered whether certain use of the property disqualified it from zero rating.

Background

In order to qualify for zero rating a building it has to be used for “relevant charitable purpose”

This means that it is used otherwise than in the course or furtherance of a business. In broad terms, where a charity has a building constructed which it can show it will use for wholly non business purposes then the construction work will be zero rated by the contractor. This is the case even if there is a small amount of business activity in the building as long as these can be shown to be insignificant (which is taken to be less than 5% of the activities in the whole building) This so called de-minimis of 5% can be of use to a charity. In order for zero rating to apply the charity must issue a certificate to the builder stating the building will be used for non-business purposes.

Although the UT supported HMRC’s appeal against the F-tT decision there was an interesting comment made by the UT. The fact that students paid towards the cost of their courses (albeit subsidised) meant that business supplies were made, and the quantum of these fees exceeded the 5% de minimis meant that the construction works were standard rated. This decision was hardly surprising, however, a comment made by the Tribunal chairman The Honourable Mr Justice Barling Judge Colin Bishopp may provide hope for charities in a similar position to the appellant: he stated that it believed that the relevant legislation should be reconsidered, suggesting that;

“… it cannot be impossible to relieve charities of an unintended tax burden while at the same time protecting commercial organisations from unfair competition and preventing abuse …”.

In my view, it is worth considering the summing up in its entirety as it helpfully summarises the current position and provides some much sought after common sense in this matter:

“We cannot leave this appeal without expressing some disquiet that it should have reached us at all. It is common ground that the College is a charity, and that the bulk of its income is derived from public funds. Because that public funding does not cover all of its costs it is compelled to seek income from other sources; but its doing so does not alter the fact that it remains a charity providing education for young people. If, by careful management or good fortune, it can earn its further income in one way rather than another, or can keep the extent of the income earned in particular ways below an arbitrary threshold, it can escape a tax burden on the construction of a building intended for its charitable purpose, but if it is unable to do so, even to a trivial extent, it is compelled to suffer not some but all of that tax burden. We think it unlikely that Parliament intended such a capricious system. We consider it unlikely, too, that Parliament would consider it a sensible use of public money for the parties to litigate this dispute twice before the FTT and now twice before this tribunal. We do not blame the parties; the College is obliged to maximise the resources available to it for the pursuit of its charitable activities, just as HMRC are obliged to collect tax which is due. Rather, we think the legislation should be reconsidered. It cannot be impossible to relieve 16 charities of an unintended tax burden while at the same time protecting commercial organisations from unfair competition and preventing abuse”.

Action

If any charities, or charity clients have been denied zero rating on a building project, it will be worthwhile monitoring this development. Please contact us if you require further information.

VAT Sixth Form Colleges – Changes

By Marcus Ward 25 November 2015

In today’s Autumn Statement, the Chancellor announced that Sixth Form Colleges will be able to convert to academies.

This means that colleges which do convert will need to review their VAT position. There are immediate decisions to make on how to structure and deal with VAT. This Statement is great news for colleges and there will be an immediate and ongoing VAT benefit if they become an academy. However, as with all things VAT, there are also pitfalls. As with schools converting to academy status, it is usual that the Trustees and relevant staff will need to consider VAT for the first time. We are able to guide academies through the VAT maze and help them maximise this new beneficial tax position. We have considerable experience in dealing with VAT and academies and advise over 50 across the country. Please contact us if these changes affect you, or you would like to discuss the implications. Please see our academy services here

VAT Flat Rate Scheme – beware the hidden costs

By Marcus Ward 5 November 2015

VAT Basics

Anything that makes VAT easier and that can even reduce the amount payable must be a good thing….right?

The Flat Rate Scheme (FRS) was introduced to simplify VAT accounting for small businesses (with an annual turnover under £150,000) and does away with the concept of input and output tax. Instead a flat rate is applied to a business’ VAT inclusive turnover. This means a business in the FRS cannot reclaim any VAT incurred on its purchases, but a lower (than 20%) rate of VAT is applied to its VAT inclusive income.

Additionally, there is an option to only account and pay VAT when the business itself has been paid by its customers; doing away with VAT bad debt issues and improving cashflow.

Now this certainly has its attractions in terms of reducing the administrative burden and some business find that it reduces the amount of VAT payable. However care should be taken to select the appropriate business category/rate. A simple exercise to compare VAT declared under the “normal” rules to that due under the FRS is clearly prudent. But, as with all things VAT, there can be a catch.

The two drawbacks to the scheme

1) If a business incurs a significant amount of input tax then, unless the flat rate percentage benefit outweighs the loss of input tax, then the FRS is not for them.

2) If a business makes any supplies at the zero rate, or that are exempt, or outside the scope of VAT this income is also included in the turnover for the FRS. The result is then that VAT has to be accounted for on sales that would be VAT free under the normal VAT rules.

This is a bad thing!

Examples of businesses which need to be particularly aware are ones which:

– Export goods or services

– Provide goods or services cross-border to other EC member States

– Sell books, food, or children’s clothes

– Build new homes

– Provide transport

– Let property

– Are charities or Not For Profit entities

– Provide financial or insurance services or brokerage

– Provide health and/or welfare services

– Provide education and/or training

– Offer subscriptions to membership organisations

– Provide sport services

– Are usually in a repayment position with HMRC

(This list is not exhaustive).

The FRS should certainly be considered for smaller businesses especially start-ups; since a first year discount is available for those that are in their first year of VAT registration. These get a one per cent reduction in the flat rate percentage until the day before their first anniversary of becoming VAT registered.

It is important for advisers to consider whether a client would benefit from being in the FRS, or indeed, whether continuation of the scheme remains advantageous to the business.

The VAT flat rates

The VAT flat rate you use depends on the type of business. If the rate changes, a business must apply the new rate from the date it changes. Also, if the nature of a taxpayer’s business changes it is important to review its FRS position.

The applicable rates here

The detailed rules of the FRS here

VAT – An important ECJ case which will affect charities – Sveda

By Marcus Ward 28 October 2015

A benefit to charities?

In the case of Sveda (C-126/14) which was recently heard by the European Court of Justice (ECJ) the issue was whether input tax was recoverable on the construction of a recreational woodland path which ended at a shop that Sveda owned and made taxable supplies from. Full case here

90% of the construction costs were met by Grant received from the Lithuanian Ministry of Agriculture on the condition that the path was made available free of charge to the public for a period of five years. There was no dispute that the grant was outside the scope income for Sveda.

The authorities disallowed the VAT claimed on 100% of the costs on the grounds there was no link to taxable supplies since free access is a non-economic activity because there was no consideration paid to use the path. Alternatively, there was a contention that only 10% of the VAT should be reclaimed, since the company only met 10% of the cost.

Sveda argued that, although the path could be used free of charge, the purpose was increase taxable sales from its shop (food, drink and souvenirs). This meant there was a link between the VAT incurred and its economic activity as a whole.

The ECJ rejected the view that the input tax should be blocked in its entirety or in part. Its view was that the expenditure was incurred with the intention of carrying out an economic taxable activity, even if there was no direct link to any one specific supply and use of the path was free. The VAT was overhead VAT. No exempt supplies (that would break the chain of deduction) took place.

So, although the path was used for a non-business activity (free access) the ECJ deemed that the input tax incurred on the costs of building the path was deductible. As there was a link to economic activities the VAT is treated as overhead and, in this case, fully recoverable.

Although Sveda is a commercial company and the decision will no doubt be of assistance to commercial entities, there may be a significant impact on charities and NFP organisations. This judgment highlights the basic right to deduct VAT where a link to taxable supplies made by a taxable person can be demonstrated. It does not matter whether the link is to one taxable supply or to all the taxable economic activities. The non-business use of the asset did not prevent recovery. The outcome would no doubt have been different if Sveda was only involved in building the path and just providing free access to it without also selling items form the shop.

On a personal note, this case has echoes of one I took to Tribunal for The Imperial War Museum – with a similar successful outcome. HMRC views here

Let’s hope it will be just as useful for the taxpayer as the landmark IWM decision.

If you think you, or a charity you are aware of, or a client of yours may be affected by this decision, please contact me. This may be the case if the charity undertakes both business and non-activities. I would always counsel that a charity should have its activities reviewed from a VAT perspective. There are usually savings that could be made.

Charities and VAT

By Marcus Ward 7 September 2015

Overview

Surely charities don’t have to pay taxes?

This is a common myth, and while charities do enjoy some VAT reliefs, they are also liable for a number of VAT charges.

Charities have a very hard time of it in terms of VAT, since not only do they have to contend with complex legislation and accounting (which other businesses, no matter how large or complicated do not) but VAT represents a real and significant cost.

By their very nature, charities carry out “non-business” activities which means that VAT is not recoverable on the expenses of carrying out these activities. Additionally, many charities are involved in exempt supplies, eg; fundraising events, property letting, and certain welfare and educational services, which also means a restriction on the ability to recover VAT on attributable costs.

These two elements are distinct and require separate calculations which are often very convoluted. The result of this is that charities bear an unfair burden of VAT, especially so since the sector carries out important work in respect of; health and welfare, poverty, education and housing etc. Although there are some specific reliefs available to charities, these are very limited and do not, by any means, compensate for the overall VAT cost charities bear.

Another issue is legal uncertainty over what constitutes “business income” for charities, especially the VAT status of grants. It’s worth bearing in mind here the helpful comment in the EC case of Tolsma translated as: “…the question is whether services carried on by [a person] were carried on for the payment or simply with the payment”.

Many charities depend on donations which, due to the economic climate have fallen in value at a time when there is a greater demand on charities from struggling individuals and organisations.

What can be done?

Ensure any applicable reliefs are taken advantage of.
If significant expenditure is planned, ensure that professional advice is sought to mitigate any tax loss.
Review the VAT position to ensure that the most appropriate partial exemption methods and non-business apportionment is in place.
Review any land and property transactions. These are high value and some reliefs are available. Additionally it is possible to carry out planning to improve the VAT position of a property owning charity.
Review VAT procedures to ensure that VAT is declared correctly. Penalties for even innocent errors have increased recently and are incredibly swingeing.
Consider a VAT “healthcheck” which often identifies problems and planning opportunities.

We have considerable expertise in the not for profit sector and would be pleased to discuss any areas of concern, or advise on ways of reducing the impact of VAT on a charity.

More detail on VAT and Charities for guidance

Business activities

It is important not to confuse the term ‘trading’ as frequently used by a charity to describe its non-charitable commercial fund-raising activities (usually carried out by a trading subsidiary) with ‘business’ as used for VAT purposes. Although trading activities will invariably be business activities, ‘business’ for VAT purposes can have a much wider application and include some or all of the charity’s primary or charitable activities.

Registration and basic principles

Any business (including a charity and NFP entity or its trading subsidiary) that makes taxable supplies in excess of the VAT registration threshold must register for VAT. Taxable supplies are business transactions that are liable to VAT at the standard rate, reduced rate or zero rate.

If a charity’s income from taxable supplies is below the VAT registration threshold it can voluntarily register for VAT but a charity that makes no taxable supplies (either because it has no business activities or because its supplies or income are exempt from VAT) cannot register.

Charging VAT

Where a VAT-registered charity makes supplies of goods and services in the course of its business activities, the VAT liability of those supplies is, in general, determined in the normal way as for any other business. Even if VAT-registered, a charity should not charge VAT on any non-business supplies or income.

Reclaiming VAT

This is a two stage process. The first stage in determining the amount of VAT which a VAT-registered charity can reclaim is to eliminate all the VAT incurred that relates to its non-business activities. It cannot reclaim any VAT it is charged on purchases that directly relate to non-business activities. It will also not be able to reclaim a proportion of the VAT on its general expenses (eg; telephone, IT and electricity) that relate to those non-business activities.

Once this has been done, the remaining VAT relating to the charity’s business activities is input tax.

The second stage: It can reclaim all the input tax it has been charged on purchases which directly relate to standard-rated, reduced-rated or zero-rated goods or services it supplies.

It cannot reclaim any of the input tax it has been charged on purchases that relate directly to exempt supplies.

It also cannot claim a proportion of input tax on general expenses (after adjustment for non-business activities) that relates to exempt activities unless this amount, together with the input tax relating directly to exempt supplies, is below the minimis limit.

Business and non-business activities

An organisation such as a charity that is run on a non-profit-making basis may still be regarded as carrying on a business activity for VAT purposes. This is unaffected by the fact that the activity is performed for the benefit of the community. It is therefore important for a charity to determine whether any particular transactions are ‘business’ or ‘non-business’ activities. This applies both when considering registration (if there is no business activity a charity cannot be registered and therefore cannot recover any input tax) and after registration. If registered, a charity must account for VAT on taxable supplies it makes by way of business. Income from any non-business activities is not subject to VAT and affects the amount of VAT reclaimable as input tax.

‘Business’ has a wide meaning for VAT purposes based upon Directive 2006/112/EC (which uses the term ‘economic activity’ rather than ‘business’), UK VAT legislation and decisions by the Courts and VAT Tribunals. An activity may still be business if the amount charged does no more than cover the cost to the charity of making the supply or where the charge made is less than cost. If the charity makes no charge at all the activity is unlikely to be considered business.

An area of particular difficulty for charities when considering whether their activities are in the course of business is receipt of grant funding.

Partial Exemption

The VAT a business incurs on running costs is called input tax. For most businesses this is reclaimed on VAT returns from HMRC if it relates to standard rated or zero rated sales that that business makes. However, a business which makes exempt sales may not be in a position to recover all of the input tax which it incurred. A business in this position is called partly exempt. Generally, any input tax which directly relates to exempt supplies is irrecoverable. In addition, an element of that business’ general overheads are deemed to be in part attributable to exempt supplies and a calculation must be performed to establish the element which falls to be irrecoverable.

Input tax which falls within the overheads category must be apportioned according to a so called; partial exemption method. The “Standard Method” requires a comparison between the value of taxable and exempt supplies made by the business. The calculation is; the percentage of taxable supplies of all supplies multiplied by the input tax to be apportioned which gives the element of VAT input tax which may be recovered. Other partial exemption methods (so called Special Methods) are available by specific agreement with HMRC.

My flowchart may be of use: partial exemption flowchart

De Minimis

There is however relief available for a business in the form of de minimis limits. Broadly, if the total of the irrecoverable directly attributable (to exempt suppliers) and the element of overhead input tax which has been established using a partial exemption method falls to be de minimis, all of that input tax may be recovered in the normal way. The de minimis limit is currently £7,500 per annum of input tax and one half of all input tax for the year. As a result, after using the partial exemption method, should the input tax fall below £7,500 and 50% of all input tax for a year it is recoverable in full. This calculation is required every quarter (for businesses which render returns on a quarterly basis) with a review at the year end, called an annual adjustment carried out at the end of a business’ partial exemption year. The quarterly de minimis is consequently £1,875 of exempt input tax.

Should the de minimis limits be breached, all input tax relating to exempt supplies is irrecoverable.

Summary

One may see that this is a complex area for charities and not for profit entities to deal with. Certainly a review is almost always beneficial, as are discussions regarding partial exemption methods.

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