The following update has been received from Sandy Adirondack, voluntary sector legal expert: www.sandy-a.co.uk.
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Very quick intro to VAT
VAT is an extraordinarily complex tax, but organisations which ignore it do so at their peril. Any organisation, including a charity, which does not register when it has to will face substantial penalties (the registration threshold for 2018-19 and 2019-20 is £85,000 of taxable business supplies – goods or services – in any 12-month period or expected within the next 30 days).
An organisation can register voluntarily if it makes taxable supplies, but its level of these is below the threshold. If it does not do this when it would be advisable to do so, it may lose the opportunity to claim back some VAT it has paid. But the decision to register voluntarily is complex, and should never be taken without advice from a VAT specialist (and for charities, this specialist should have expertise in charity VAT).
Whether a charity is registered for VAT or not, it should be aware of the reliefs available to charities, for example on much charity advertising and many fundraising materials. Failure to claim these will result in paying unnecessary VAT.
The first three guides include the background to VAT; the difference between business and non-business activities; the difference between exempt and taxable business activities; which activities count towards the registration threshold; VAT treatment of income received by charities; VAT reliefs all charities, even if they are not registered for VAT, can obtain on their purchases; and more. The final two are more detailed.
- Made Simple guides: VAT. Sayer Vincent accountants, August 2018, 24pp, PDF: via https://www.sayervincent.co.uk/resources/made-simple-guides/. In my opinion, the best starting point.
- How VAT affects charities. HMRC, VAT notice 701/1: https://www.gov.uk/guidance/how-vat-affects-charities-notice-7011.
- VAT. Charity Tax Group: https://www.charitytaxgroup.org.uk/tax/vat/. Similar to the above but explains more of the background, and includes more examples
- The complete guide to VAT for charities, 4th edition. Alex Hardman and Kate Sayer, Directory of Social Change, 2016, 640pp. Book £50, downloadable PDF £48: https://www.dsc.org.uk/publication/complete-charity-vat-handbook/.
- VAT guide. HMRC, VAT notice 700: https://www.gov.uk/guidance/vat-guide-notice-700. Basic information about everything to do with VAT.
VAT bear traps
Bill Lewis, expert on VAT for charities and social enterprises at Bates Wells Braithwaite solicitors, has summarised 10 VAT bear traps for the charity sector.
- Wrongly attributing an income stream to grant funding when it is in fact a fee for the provision of services [see Grants v contracts, below].
- Treating corporate donations or sponsorship as donations and therefore non-business, when some or all of the income may be payment for something in return, and therefore subject to VAT.
- Not charging VAT on the supply of services between a charity and its trading subsidiary – which has to be done unless the two are in a VAT group.
- Treating fundraising as exempt from VAT even if it does not fall within the fundraising exemption.
- Treating the supply of education as always exempt, although sometimes it is not.
- Not realising that the supply of agency staff is subject to VAT even if those staff are going to be providing medical, education or other services that are VAT exempt – because the agency is providing people, not the VAT exempt service itself.
- Thinking VAT can be recovered in full just because the charity is registered for VAT. Even if a charity is registered for VAT, VAT can only be recovered to the extent that it makes VAT taxable supplies. VAT cannot generally be recovered on activities funded by grants or donations or on VAT exempt activities, and can only be partly recovered on central costs and mixed activities.
- Thinking the zero rate on charity advertising applies on all advertising – but it only applies on advertising in general media, not for specific individuals.
- Before signing a contract, not checking what it says about VAT. If it does not specifically say the price is inclusive of VAT, you can expect VAT to be charged on top unless the service falls within a VAT exemption.
- If registered for VAT, not dealing properly with the reverse charge when receiving services from abroad – or if not registered for VAT, not realising registration is required if the value of services from abroad reaches the registration threshold.
The full article is only a bit longer than the summary above and is at:
- 10 VAT bear traps for the charity sector. Charity Financials, 4 October 2018: https://www.charityfinancials.com/charity-financials-insider/10-vat-bear-traps-for-the-charity-sector-1782.html.
VAT: Grants v contracts
In January 2018 HMRC updated its guidance on whether a payment to an organisation – in particular from a public sector body – is a grant, which is non-business and therefore outside the scope of VAT, or is consideration (a fee) for the supply of a service. The distinction is crucial.
- If the payment is a fee and the service to be provided is not exempt from VAT, the fee is for a taxable business supply. If the recipient is not registered for VAT, it will count towards the registration threshold. If the recipient is registered for VAT, it will have to charge VAT to the funder/purchaser. The good news is the recipient organisation can then recover VAT on many costs incurred in delivering the service.
- If it is a fee and is exempt from VAT, the fee is for an exempt business supply. If the recipient is not registered for VAT, will not count towards the registration threshold. If the recipient is registered for VAT, it will not have to charge VAT to the funder/purchaser. It will not generally be able to recover VAT on costs involved in providing these services unless it can take advantage of the de minimis rules or partial exemption. (These are explained in the basic resources listed above.)
- If the payment is a grant, it is non-business. It is outside the scope of VAT, does not count towards the registration threshold, does not require VAT to be charged to the funder, and does not enable the recipient to recover VAT on costs incurred in providing whatever is being funded.
The HMRC guidance includes lists of factors, based on case law, which indicate the payment is a grant or is consideration for a supply, and factors which are neutral. Neutral factors include what the arrangement is called – the fact that it is called a grant or a contract is not in itself relevant.
Attached is a short article by Bill Lewis summarising what he sees as the key point. In the article, he says:
“My approach when considering whether a payment is a grant or a fee is to ask ‘who benefits from the payment’? If there is a clear benefit to the funder, or to named individuals, then we are usually looking at a supply of services, potentially subject to VAT. Where the funder does not gain any tangible benefit, and the real beneficiary of the funding is either the recipient or the wider general public, then we are usually looking at a grant outside the scope of VAT.
“With this in mind, I take the view that if a payment is to help the funder fulfil their own legal or statutory responsibilities then it cannot be a grant but must be consideration for a supply of services and therefore a fee. There is a clear benefit to the funder. However, where a payment is made because the funder would like something done but appears to have no clear benefit from that, then the payment is not a fee but is a grant.”
This overall approach provides a framework for assessing the factors in the guidance indicating whether the payment is a grant or a fee.
Bill makes the point that the revised guidance is welcome, but “still leaves too much to the judgement of the recipient of funding.” As another expert in the field, Graham Elliott, has said, “The answer ‘It depends’ will continue to be a popular one.”
- Payments that are not consideration: Grants. HMRC Supply and consideration manual: https://www.gov.uk/hmrc-internal-manuals/vat-supply-and-consideration/vatsc06300. The actual guidance, in 10 sections.
- Grants, contacts and VAT. Bill Lewis, Bates Wells Braithwaite Charity and Social Enterprise Update, summer 2018, p.18: Attached or at https://www.bwbllp.com/knowledge/2018/08/14/grants-contracts-and-vat/.
- Review of HMRC VAT manuals relating to grants and contractual income. Graham Elliott, Charity Tax Group, 6 March 2018: https://www.charitytaxgroup.org.uk/commentary/review-hmrc-vat-manuals-grants-contractual-income/. Much longer and more detailed article about the new guidance.