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Charity Tax and VAT update

Steve Hodgetts
VAT Partner

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T: 0121 214 3100
F: 0121 214 3101

Graham Batty
Associate Director

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T: 0121 214 3100
F: 0121 214 3101

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The past few months have seen significant activity on the legislative front following the general election and the formation of the new coalition government. The need to keep up to date and be informed on all issues whether they impact in the short or medium term has never been more important. 

This update brings together the topics which our Tax and VAT specialists believe should be drawn to the attention of all those involved in the Charity and Not for profit sector at this time. We expect further important developments as the government finds its feet and will issue updates accordingly.

  • The need to register for Gift Aid relief

    Having seen the time limit for Gift Aid repayment claims shortened to four years other changes are on the horizon with the first of this year’s Finance Acts allowing EU charities to claim UK charity tax reliefs and paving the way for a change in the way in which charities and community amateur sports clubs interact with HMRC in future.  

    The new regime
    The changes come as a consequence of the UK and other member states having to allow charities established in any EU country to claim charitable tax reliefs following the ECJ decision in the Persche and other cases. 

    A new tax definition of charity
    For the first time there is a tax definition of a charity and a requirement to register with HMRC in order to claim charity tax reliefs.  To claim tax relief charities must be:

    • Established for charitable purposes, as defined by Charities Act 2006, only; and
    • Subject to the jurisdiction of the High Court or its local equivalent; and
    • Registered with the relevant local regulator; and
    • Have management who are “fit and proper.”

    Fit and proper managers
    As part of HMRC’s drive to combat fraud and abuse charity managers will, in future, have to be fit and proper persons if tax relief is to be available. The definition of manager follows the general charity law definition of those having general control and management of the administration of the charity, which would suggest it applies only to trustees. However, HMRC’s original guidance suggested that managers include any cheque signatory and in larger charities certain employees who are able to determine how funds are spent.  This is a somewhat wider view than the law seems to allow and following consultation with a number of organisations HMRC issues new guidance on 9 July which applies teh test only to trustees and any senior management team.

    Unfortunately, fit and proper is not defined in the legislation and will be decided by HMRC. However, they say they will apply the test flexibly and work with charities to ensure that tax relief remains available. HMRC will, though, look at their records if they think a person’s fit and proper status is in question. Ensuring that trustees and managers are fit and proper is, of course, good governance, and HMRC have published a fit and proper declaration on their website which charities may get trustees and managers to sign should they wish.

    Filling out the forms
    Existing charities will not be required to formally register with HMRC unless they wish to make a gift aid or other tax repayment claim for the first time. They will, though, have to notify HMRC of changes in trustees, managers and other administrative details using the new form ChV1. The good news is that the new requirements, at the moment, only apply to charities that make gift aid repayment claims. They will, though, be extended to other charities in due course.

    An opportunity for international charities?
    There is clearly an opportunity for charities working in other EU states to register there and claim any local charity tax reliefs. It would, of course, be dangerous to assume that other members of the EU have a charity tax regime that is similar to that in the UK, or indeed as generous. In addition, other member states are not introducing the changes as quickly as the UK.  It will be a case of taking advice on the potential benefits in each state where the charity is operating. If you contact the author or your usual Baker Tilly contact, we can arrange this with colleagues in the local Baker Tilly International offices. 

    On the horizon
    More changes are also likely in the next twelve months as the Treasury’s informal consultation on gift aid reform is due to report in September with any changes being introduced in the 2011 Budget. The replacement of the draconian substantial donor rules is also expected at the same time.

  • Charities to be hit hard by VAT increases

    The VAT increase from 17.5% to 20% which is to take effect on 4 January 2011 will have a significant detrimental effect on the already hard-pressed charity sector.

    VAT is a major burden for charities because, generally speaking, they are not permitted to recover the VAT element of their costs as they are deemed to be carrying out ‘non-business’ activities. It was recently estimated by 16 of the largest charities that an increase in the VAT rate from 17.5% to 20% would cost them £5 million per annum.

    Now more than ever charities will need to ensure they review all possible VAT reliefs to ensure they are claiming the maximum available to them. For example, charities may qualify to receive zero-rated construction services for new buildings. Although HMRC have imposed a new requirement that the building must be intended to be used 95% or more for a relevant charitable purpose (as opposed to the previous 90% requirement), many charities may be able to turn this ‘negative’ into a positive (see 'An Extra Statutory Concession that may benefit some charities' later in this bulletin).  Furthermore, although many charities are aware that they can receive advertising services zero-rated, some do not realise how far the relief extends. For example, pay-per-click sponsored links on search engines will qualify, as will job adverts placed by the charity. There are also a number of further reliefs.
     
    In addition, charities are strongly advised to take advantage of the remaining 5 month period until the rate changes to bring forward expenditure to ensure as much as possible is subject to VAT at 17.5%. However, there will be limits on how much can be paid for now as there is anti-forestalling legislation now in place.

    The rules and regulations are as ever complex but still provide opportunities. A real understanding of the way in which the relevant VAT rate is applied to supplies and services is essential.

  • VAT rate change - guidance

    For supplies of goods and services, the current rate of VAT (17.5%) will apply if the supply takes place, or the invoice is issued, or payment is received, before the new rate comes into force. So the current rate of VAT will apply in the following circumstances:

    • Where goods or services are provided before the date of change but will be invoiced after that date, the current rate of VAT should be charged.
    • Any supplies spanning the date of change, which are invoiced after the date of change, can be apportioned so that VAT at the current rate is charged on work performed before the date of change.
    • Where goods and services will be provided after the date of change but an invoice is raised (or payment received) before that date, the current rate will apply. However, there are some anti-avoidance measures to be aware of here, which were imposed in respect of the January 2010 VAT rate increase and which will apply to the January 2011 VAT rate increase

    Anti-avoidance measures
    If the supplier charges VAT at the current rate, a supplementary 2.5% VAT charge will become payable on 4 January 2011 if the following conditions apply:

    The customer cannot recover in full the VAT charged by the supplier and:

    • The supplier and customer are connected parties; or
    • The value of the supply (and any related supplies made under the same scheme) exceeds £100,000 (if outside normal commercial practice) or 
    • The supplier or someone connected funds a prepayment for the goods or services; or
    • An advance VAT invoice is issued where payment is not due in full within six months (except hire purchase invoices issued in accordance with normal commercial practice).

    What Charities should be aware of?
    Charities should be aware of the rules relating to changes in the VAT rate as this will enable them to take full advantage of the current rate of 17.5% in advance of the VAT rate increase. Charities that are planning any large scale expenditure should consider bringing the expenditure forward where possible. Where supplies span the VAT rate change date, charities should ensure that their supplier is aware of the rules regarding apportionment of the supply to ensure that the 17.5% VAT rate is applied to goods and services to the greatest extent possible.

    Other ways to save VAT
    Charities should take advantage of all available VAT reliefs e.g.

    • advertising services received by charities;
    • purchase of qualifying goods for medical research, treatment or diagnosis;
    • new buildings constructed for residential or non-business charitable activities;
    • self-contained annexes constructed for non-business charitable activities;
    • building work to provide disabled access in certain circumstances;
    • building work to provide washrooms and lavatories for disabled persons;
    • supplies of certain equipment designed to provide relief for disabled or chronically sick persons;
    • approved alterations to listed buildings used for non-business charitable purposes.

    There are also special exemptions available for charities:

    • income from Fundraising events;
    • admissions to certain cultural events and premises;
    • relief from “Options to Tax” on the lease and acquisition of buildings put to nonbusiness use.  Membership subscriptions to certain public interest bodies and philanthropic associations;
    • sports facilities provided by non-profit making bodies;

    The reduced VAT rate (5%) is also available for charities in certain circumstances:

    • gas and electricity in premises used for residential or non-business use by a charity;
    • renovation work on dwellings that have been unoccupied for over 2 years;
    • conversion work on dwellings to create new dwellings or change the number of dwellings in a building;
    • installation of certain energy saving materials and grant-funded heating equipment;
    • installation of mobility aids for persons aged over 60.

  • An extra statutory concession that may benefit some charities

    Many charities will be familiar with HM Revenue & Customs’ extra-statutory concession 3.29. This concession allows charities to obtain zero-rating on construction projects provided the new building will be put to 90% non-business (relevant charitable) use. This concession removes the VAT cost on those buildings and without it many projects could not go ahead.

    It therefore came as a shock to many charities and their representative groups when, on 1 July 2009, HMRC issued a Brief and Information Sheet stating that the concession was to be withdrawn. In its place, HMRC have imposed a new requirement that the building must be intended to be used 95% or more for a relevant charitable purpose. 

    Although the withdrawal of the concession was without question bad news for some charities, many other charities may be able to turn this ‘negative’ into a positive. The opportunity exists in the fact that HMRC will allow any method for calculating use provided it is fair and reasonable. Previously, the concession only allowed for calculations based on time spent on charitable activity, floor space put to charitable use or on a headcount basis.

    This change in policy has assisted one of our clients in the education sector in obtaining zero-rating on the construction of a new building. Whereas previously our client would not have met the 90% test based on time spent, floor space or headcount, it could meet the new 95% test by using an income-based method. The method is, without question, fair and reasonable and good progress is now being made on agreeing this method with HMRC.

    Where charities do not meet the 90% test based on one of the prescribed methods, we recommend they seek VAT advice as to whether they qualify for the 95% charitable use test using any fair and reasonable method. The VAT at stake means that this should be a priority when considering new builds or property acquisitions.

  • Another opportunity to recover VAT

    HMRC recently announced an opportunity to recover VAT in relation to pay-per-click (PPC) charity advertising.

    Where a charity pays a search engine an amount whenever its website is accessed through the sponsored link, HMRC has historically believed that VAT is due on the charge. HMRC has now announced that it has revised its policy such that PPC-sponsored links qualify as advertisements. Consequently, when supplied to a charity zero-rating should apply. In addition, the supply of copyright and design services associated with the sponsored links also qualify for zero-rating. However, care will need to be taken as services such as those relating to the optimisation of search engine hits do not qualify for zero-rating.

    There is now an opportunity for charities to conduct a review of such costs and potentially recover the VAT that has been erroneously charged to them over the past 4 years. As the charity is the recipient of the supply it is the supplier (usually a search engine such as Google, Ask, Bing etc.) that must make the claim to HMRC. On receipt of the money from HMRC the supplier should then pass the funds on to the charity. If the charity was not able to recover in full the VAT it was charged on these advertisements, this refund will be very welcome.

  • CC35 - Trustees, trading and tax

    Charities that conduct trading activities have to be particularly careful to ensure that they structure those activities correctly to avoid pitfalls from both charity and taxation points of view. The Charity Commission have very recently issued (3 August 2010) updated guidance on this complex area – CC35 – Trustees, Trading and Tax – which is available to download on the Charity Commission website.