Tax on charities – surely not?
Unfortunately, yes. Tax continues to be a challenge for the charity sector, and VAT is no exception. The VAT regime can be a mixed experience for charities. There are beneficial rules on advertising spend (potentially zero-rated), fund raising events (exempt if qualifying) & sales of donated goods (zero-rated) amongst others, but significant challenges remain.
Charities can operate alone or with trading subsidiaries. It is important that the chosen structure & activities of the relevant entities be reviewed carefully to determine firstly whether these activities are classified as non-business, business but exempt for VAT, or business and taxable for VAT. This can be a complex matter and is a first step in determining any liabilities to register for VAT (or even whether voluntary VAT registration would be sensible), as well as correctly identifying VAT due on sales and, most interestingly, VAT recovery on costs.
Complexities abound for charities, and frequently arise where a property is being built or otherwise acquired, particularly where there is a mixture of uses. The high values involved, the usage to which the asset is put and the interaction between charity and property VAT rules create considerable food for thought. Advice is best sought in such cases.
In addition to the usual challenges, HMRC are adding a new one in the form of Making Tax Digital (MTD) with its requirements for the use of new qualifying software to submit VAT return information, as well as processing, transferring and storing VAT data electronically. For many smaller charities, this could result in the need to source new software and incur time and advisory costs in getting processes right. HMRC have promised a “light touch” approach for a year starting from the MTD implementation in April 2019, but have also just announced the new penalty regime for it.
There is much to consider with MTD and now is a sensible time for those in the sector to plan ahead, if they have not already done so. It may be that outsourcing the VAT function to third party agents is an attractive alternative.
Elsewhere, HMRC have updated their guidance on the cost sharing exemption groups (CSEG), restricting its application to certain sectors. There are ongoing discussions with government regarding extending reliefs for charities as part of the Treasury Select Committee VAT inquiry, and VAT case law continues to develop, not always favourably, in the sector.
If you would like to discuss any aspect of VAT in relation to your charity, please do get in touch with me.
Date: 24th July, 2018
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