Background

It is now known that the standard rate will rise to 20% on 4 January 2011. There are several ways in which charities can plan to take advantage of the current rate of 17.5% given that the increase in the VAT rate is imminent. Some examples of this are as follows:

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 non-business 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.