Tag Archives: charity VAT

Charity VAT – Am I claiming all my reliefs?

Generally charities are subject to the same VAT rules as everyone else for most purposes. However, there are a series of reliefs available to them enabling them to pay less or even no VAT. This can assist with cash flow for those charities which can recover the VAT they incur since they don’t have to pay the VAT and then wait to get it back again later on. For those charities that cannot recover VAT, this can be an absolute gain.

There are numerous reliefs, many of which are applicable only to specific types of charities e.g. those working with handicapped or blind persons or operating life boats. But also some which can apply to all. Here we look only at three common areas.

1. Property

Most charities inevitably have to occupy property. They could do this by owning their own property or renting premises.

Owning through purchase of a property

Many non-residential buildings are subject to VAT because the owner has exercised something called the ‘option- to- tax’. In simple terms this means that the sale falls outside of the normal exemption for such buildings and VAT becomes due. However, where the purchaser is a charity the exemption continues to apply as long as it will use the building for non-business purposes and not for office purposes.
There are a couple of key points here. Firstly, the charity needs to communicate this intention to the vendor in order to gain relief. Secondly, it has to be able to demonstrate non-business use if asked to by HMRC. Finally, it must ensure that the office use test is passed.
Both the non-business and office use test have a degree of scope for flexibility if the vendor and the charity agree (through discussion/negotiation) and the non-qualifying use is no more than 5% of total use.

Construction

A charity might chose to have its property specifically built. Whilst construction services in the course of a new non-residential building are usually standard rated, there is a zero rating available where the construction is for a charity which will use that building for non-business purpose. The charity needs to issue a certificate to the contractor to achieve this and that certificate should be given before the works commence.

Renting Property

Similarly to the comments above relating to the purchase of a property, many landlords have also opted to tax non-residential buildings and charge VAT on rents. Again, a charity occupying the building for non-business use can escape this VAT charge.
Again, the use must be non-business and not as an office, though the 5% tolerance is also available here.

2. Reduced rating – fuel and power

The 5% reduced rate applies to many supplies and charities can benefit from all of these. Specific to charities is an extension to the usual relief for supplies of fuel and power (gas, electricity etc). Where a charity can demonstrate that it is purchasing the fuel and power for non-business purposes, it should only pay 5%.
Are you paying 20% or 5% on your fuel and power?

3. Zero rating of advertising

Advertising is generally standard rated but supplies to charities can be zero rated. Historically, there have been many restrictions on the type and form of advertising covered by the relief but it now covers almost all media advertising.
Care needs to be taken on distinguishing between media advertising and the supply of other items with an advertising content e.g. branded merchandise and advertising on own web sites and other platforms.
Are you paying 20% on your advertising?

Review your charity’s VAT position

A review of your VAT position may well lead to revealing reliefs that are available to you.

Seek advice from a specialist charity VAT expert to ensure your organisation isn’t missing out.

Charity VAT – Are you in business?

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VAT is a tax on supplies made by businesses. Surely therefore VAT has nothing to do with charities because they are not in business but exist because of their charitable objectives. Whilst seemingly a sensible approach, charities do get involved in a very wide range of activities that could be seen as businesses for VAT purposes.
The fulfilment of charitable objectives will not normally constitute a business as such. Helping to provide relief and support to those in need in society is not a generally accepted business activity. But a lot of the activities a charity engages in in order to fund its charitable functions could cross the line.

Benefits to charities of being ‘in business’

One thing we come across many times is that charities don’t want to get involved with VAT and so deliberately try to avoid being seen to be in business. Whilst understandable because the compliance cost can be high and the potential for penalty worrying in the case of error, there can of course be advantages.
There are reliefs available which mean that some otherwise taxable activities are relieved and these can mean that even though there is a business being carried on, VAT registration can be avoided or even give rise to absolute gains.

What is a business?

So, if VAT is a tax on business supplies surely, this fairly fundamental concept “what is a business?” is set out in the legislation? Interestingly, it is not. In some ways this is disappointing as it leaves things unclear but in others it is useful as it gives room for interpretation and planning.
The law gives some guidance and states that the concept of business includes all trades, professions and vocations. It also includes supplies made by clubs and associations to members (no mutual trading relief or exemption here) and the grant of the right to enter premises.

Key tests

Not surprisingly this lack of definition has led to many Tribunal and court cases to test whether specific organisations were or were not in business. As a result of this we now have six key tests to consider.
1. Is the activity seriously and earnestly pursued?
2. Does it have reasonable and recognisable continuity?
3. Is there a degree of substance when looking at the values of supplies made?
4. Are activities undertaken in a regular manner and on recognised business principles?
5. Is it concerned primarily with making taxable supplies?
6. Is the activity something that would normally be done by businesses with a view to making a profit?

None of the indicia here are decisive on their own but all point one way or another. For example, where there are very high values involved there is likely to be a business but not necessarily so (indicator 3). Take the case of Wellcome Trust. It funded a lot of its activities through income derived from “profits” made from investment activities. It did this on a very significant sale. The case arose when the Trust sold a substantial part of its portfolio and realised a gain of £2.18bn. It was argued that this level of activity must be a business which would have allowed the Trust to recover a lot of input tax. However, the court ruled that value alone was not sufficient to create a business and that in realising the gain the Trust was not acting any differently to a private investor. This was not a business.
Similarly, an individual who collected old farm machinery as a hobby that he regularly sold items to fund new acquisitions into the collections was deemed not in business (indicator 2 was the only real one satisfied). But a car enthusiast who bought and sold regularly was ruled to be as he was deliberately seeking to make a profit and organised himself professionally using web sites etc. (indicators 6 and 1).

What does it mean for your charity?

Given the complexity of this area, seek the advice of a charity VAT specialist to assess if this could actually benefit your charity.

Taxes and Reliefs Affecting Charities – Part 2

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In the second part of my mini-series on taxes and reliefs affecting charities, I identify and discuss a further 5 areas where charities may be affected by UK tax legislation, including business rates relief.

1 Inheritance Tax
Reliefs are available to individuals leaving at least 10% of their estate to charity, with the estate attracting a lower inheritance tax rate.

Transfers of property to a charity are generally exempt from inheritance tax, as long as the property is held for charitable purposes.

2 Gifts of Land and Shares
Gifting certain assets such as land, UK listed shares, and some other investments to charity can generate income and capital gains tax reliefs for the donor, subject to certain criteria and anti-avoidance provisions.

These reliefs are available to the donor – the charity benefits from receiving the assets.

3 Stamp Duty Land Tax
Charities are generally exempt from paying stamp duty land tax (SDLT) where the property is used directly for charitable purposes, or indirectly by generating investment income to fund its activities.

There are conditions that may require repayment of the relief, for example if there are changes in circumstances of the charity and/or the use of the property.

4 Business Rates Relief
Charities occupying commercial property used for charitable activities are entitled to 80% relief against the full business rates – and local authorities can waive the other 20% if they wish.

However, this relief is not usually available if the property is held or occupied by a charity’s trading subsidiary since this carries out non-charitable activities.

5 VAT
VAT affects a charity in several ways, such as whether a charity is required to charge VAT on any services it provides, whether it is able to reclaim any VAT it has suffered, or whether it is entitled to relief on the goods and services it buys.

Even if a charity is not considered to be trading, it may be carrying out a business activity that requires it to register for VAT, such as charging admission to view property, selling advertising space or sponsorship in return for providing the donor with a benefit, and hiring out property.

If undertaking fundraising events, a charity may not need to charge VAT on income from the sale of tickets if the events are clearly organised and promoted with the aim of generating funds for the charity and its charitable activities.

Charities may carry out certain activities that are zero-rated – this requires them to register for VAT, but allows them to recover the VAT paid in relation to these activities without charging VAT on its supplies. Such activities include sale or hire of goods donated to the charity.

If a charity does carry out a business activity that requires it to register for VAT, then it can reclaim VAT incurred in connection with this business activity.

Charities are also entitled to various VAT reliefs on expenditure not available to individuals or businesses. Currently, these include a reduced rate of VAT charged on fuel, power, and certain energy saving materials used in a charitable building, and zero-rated supplies including advertising, certain medicinal products, and selected goods used in connection with collecting donations.

Conclusion
UK tax legislation can be a minefield, and it is now more important than ever that organisations are aware of their responsibilities. However, there can be generous allowances and reliefs available – so please do get in contact if I can assist your organisation take advantage of these whilst fulfilling your compliance requirements.

Taxes and Reliefs Affecting Charities – Part 1

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“Charities don’t pay tax!”

If only things were that simple!

It could be suggested that charities are more likely to be exposed to the impacts of tax and tax administration than commercial companies.

In fact, a charity is likely to suffer tax – paying VAT on its purchases which it may not be able to recover.

A charity may not actually pay any tax on its income or gains, or have to prepare tax returns – but it must meet certain criteria in order to get these exemptions. Charities need to be aware of all conditions and criteria in relation to their tax position, not least meeting HMRC’s definition of a charity.

Below I highlight some of the common taxes that impact charities, as well as some of the reliefs and exemptions available to charities.

1 Income and Gains
Generally, charities are exempt from income, capital gains or corporation tax on their income and gains provided that both the income and the assets are used for charitable purposes.

This applies to most sources of income such as donations, legacies, rental income, income from investments, capital gains, and lottery income.

Money generated from fundraising events also attracts this exemption.

2 Trading
Do charities trade? Yes they do – even if there is also a separate trading subsidiary company. Providing services under contracts, running lotteries, and selling tickets or sponsorship for fundraising events can be classed as trading income.

If these activities are an integrated part of a charity’s objectives (or “primary purpose” as it is known), carried out by the beneficiary, and within certain turnover limits, then the income should be tax free.

Wholly-owned trading subsidiaries are common and allow charities to separate trading activities from their core activities, whilst enjoying the relief available arising from the gifting of the subsidiary’s profits to the charity.

3 Gift Aid
Making a qualifying donation under gift aid provides benefits to both the individual and the charity – the individual obtains basic rate tax relief on the donation at source and the charity reclaims 25% of the gift from HM Revenue & Customs.
The charity must obtain a declaration from the individual confirming certain facts in order to claim the gift aid relief.

The donation must also meet specific criteria – including being from an individual who cannot receive any benefit, in excess of certain limits, from making the donation.

Special conditions on reclaiming gift aid apply to those charities that generate funds through auctions, membership subscriptions, fundraising events, and admissions to view property.

New simplified procedures, the Gift Aid Small Donations Scheme, came into effect from April 2013, enabling charities to reclaim gift aid on donations of £20 or less, up to an annual maximum of £5,000 per charity, without obtaining individual declarations (with the aim of reducing some of the administrative burden). To qualify, a charity must have existed for at least two years and made a successful gift aid claim within two of the previous four tax years.

4 Corporate Donations
Whereas gift aid provides relief to both donor and charity, there is no direct relief available for the charity when receiving donations from companies. However, the company is able treat a donation as deductible against its own taxable profits.

This also applies to the trading subsidiaries of charities – gifting the profits to the charity eliminates the subsidiary’s tax charge on its trading profits (although such a donation cannot create a loss to offset against non-trading profits). The donation must be physically paid over within nine months after the end of the accounting period to which it relates.

The charity must use the donation towards its charitable purposes.

Summary

UK tax legislation is complex and ever-changing. Navigating this maze can be a confusing, and even overwhelming, experience. In the second part of this blog, I look at 5 further taxes and reliefs available for charities.

Please do get in contact if I can assist your organisation make the most of the reliefs available whilst remaining fully compliant.