Noelia Serrano September 2016 VAT Made Simple Noelia Serrano September 2016

Introduction No overall exemption from VAT for charities VAT made simple Introduction No overall exemption from VAT for charities Problem of irrecoverable VAT Partial exemption often applies Uncertainty over the VAT status of supplies The biggest misconception concerning charities is that charities don’t pay ‘tax’ but this is not true. The burden of irrecoverable VAT is £1/2 billion pa There is no overall exemption for charities though there are some exemptions and we will talk about those a bit later on There are complexities around understanding the status of supplies and also about partial exemption which limits the amount of VAT that the charity can recover on exempt supplies. VAT is a self assessed tax and you need to decide how to treat things – ignorance is not an excuse for getting it wrong so you need to be prepared.

or outside the scope of VAT VAT made simple Activities for VAT Business Exempt Taxable Zero -rate Reduced rate Standard rate Supply Non- business or outside the scope of VAT For a transaction to be within the scope of VAT as well as a supply there must be a fee or ‘consideration’ so there must be a two way transaction. If there is a payment but there is no direct supply then the we are really looking at a form of donation If there is a supply but there is no consideration (so services are given for free) then the transaction is non-business and falls outside of the scope of VAT So there must be a two way transaction where there is a supply and a consideration (and the consideration does not have to be in the form of cash) So if there is a two way transaction with a supply and considerations the transaction is business. Business transactions can be exempt or taxable. Exempt supplies are not subject to VAT and do not count towards the VAT registration threshold Taxable supplies do count towards the registration threshold and they can be zero rated, reduced rated or standard rated. It is important to confuse non-business, exempt and zero rated supplies – there is no VAT on any of them but as we will see later on they are all very different In order to be able to calculate your VAT correctly you need to know the VAT status of your activities - So that you register for VAT when you have exceeded the threshold - So that you charge VAT on the right activities at the right rate

Business supplies Three conditions to be met for a business supply to exist: Must involve a supply – something is provided in return for consideration The supply must be of goods or services The supply must take place in the furtherance of a business activity For a transaction to be within the scope of VAT as well as a supply there must be a fee or ‘consideration’ so there must be a two way transaction There must be a supply of goods or services And in furtherance of a business activity – to profit making motive

VAT registration Taxable supplies exceed threshold VAT made simple VAT registration Taxable supplies exceed threshold Not retrospective (but can be backdated upto 4 years) Can claim back VAT on some purchases Voluntary registration Must have some taxable supplies Registration threshold £81K Deregistration threshold £79K

Non-business activities VAT made simple Non-business activities Activities funded wholly by grants or donations Subsidised welfare services (85%) Must be no supply in return (barter arrangement) Donations – no expectation of getting anything back in return unless minimal benefit (e.g. badge or acknowledgement) Grants – Which may be restricted (so given to you for a specific purpose) but funder does not get anything in return so no two way transaction Sub welfare – e.g. lunch at a day centre To sum up No substantial service received in return for the funds No 2 way transaction No VAT is charged on the income Does not count towards the VAT registration threshold You cannot recover VAT on related purchases

Exempt activities Health & welfare Education Activities in the public interest Other activities Health & welfare Education Admissions to cultural events Sport and physical education Burial & cremation Charity fundraising events Financial services Insurance Selling and renting land and buildings Betting, gaming and lotteries These are specified as exempt supplies in the legislation We will talk about the welfare exemption in more detail in the next slide and cultural activities In terms of training – training activities will only be exempt if carried out by an eligible body (a charity is an eligible body) and if the surpluses are reinvested in the same activity – If that is not they case then they will be standard rated Medical Care exemption only applies to registered practitioners e.g. osteopath yes, herbalist no. The impact of exempt supplies No VAT is charged on the income But the supply is business and this will affect recovery Exempt supplies do not count towards the registration threshold You cannot recover input VAT (VAT on your purchases) unless below certain limits Welfare (elderly, sick, distressed, disable, child) – spiritual welfare, personal care, adoption services (Specified under 6th directive – Article 13A 1 (g) In order to assess whether a service qualifies for the welfare exemption HMRC list a number of conditions and examples. You will need to check the specifics of the service to see if it is covered by the exemption or not. The service has to be provided to an individual and not a group of people The care or treatment must be part of an specific care plan for that individual An assessment of the individual’s needs has to be carried out by an appropriately trained person

VAT made simple Zero-rated supplies Sale of donated goods by a charity or its trading subsidiary Export of goods by a charity Sale of certain printed publications Sale of children’s clothing & footwear Some food and drink Water and sewerage services Zero rated supplies are the best supplies to have. Vat is at zero rate (so not extra cost for the charity) but the charity can recover all related VAT on purchases Sale of donated goods – in the charity or the trading sub Publications – has to be printed matter not e-versions Some food – Cake zero rated biscuit standard rated To sum up - You charge VAT at zero rate - You recover VAT on all related input VAT - It does count towards the VAT registration threshold

Reduced-rated supplies VAT made simple Reduced-rated supplies Gas & electricity for domestic or charity non-business use Welfare advice or information Contraceptives Installation of certain energy saving materials Smoking cessation products 5% VAT The CJEU has decided that the UK’s reduced rating for energy saving materials is too broad but the government has said it will not change UK law until Finance Act 2016.

Standard rated supplies VAT made simple Standard rated supplies Most sales of goods and services Consultancy fees Management charge to trading subsidiary Royalties Electronic publications Everything else (Supplying staff is std rated) Some postal services – Parcelforce + negotiated services If you are not VAT registered yet then we would suggest you keep a spread sheet to record standard rated, reduced rated and zero rated supplies in 12 months rolling period# SO WE HAVE FINISHED GOING OVER THE DIFFERENT TYPES OF SUPPLIES ANY QUESTIONS? Ok so let’s look at some examples of non-business supplies

VAT status? Membership subscriptions Education and training VAT made simple VAT status? Membership subscriptions Education and training Sponsorship Grant or contract Membership - Dependant on nature of benefits received. Extra-statutory concession. Multiple supplies. Value the cost of each supply. Balance usually exempt or donation. May be able to agree basis with HMRC. Note extra-statutory concession us under threat so we may lose this Education and training - Can be exempt or standard rated Or non-business like Donaldsons. This was a Edinburgh based college teaching sign language to deaf children. It received funding from Scottish Executive and local education authorities and some donations. It did charge substantial fees but these were paid by LEAs. The tribunal decided that the intention of the college was not to make a profit from the fees but to cover its costs. The college was heavily subsidised by the local authorities and there was no prospect or expectation of financial independence. Sponsorship - Sponsorship – Corporate donation – must be freely given. Benefits in return e.g. advertising or promotion of company name or logo May be possible to split into a sale of promotional services and a donation Does not affect exempt fundraising events. First thing we need to determine is whether it is really sponsorship. Is anything received in return? A corporate donation may be better – No VAT charged/Company can claim gift aid. Benefits – may be interpreted as promotional services by HMRC (ack is ok). Split – May be able to split in two. One off fundraising events with a clear fundraising purpose are always exempt. There may be other implications for e.g corporation tax. Grants and contracts are treated differently for VAT purposes so it is important for the charity to review all its agreements to decide on the correct treatment. Grants and non-business they are in essence a donation Contracts on the other hand are business and will be VATable unless an exemption applies Whether an agreement is a grant or a contract will also affect whether the income is treated as restricted or unrestricted in the accounts. Contract income is always unrestricted. Unfortunately many agreements that we come across have elements of both of the above and the status is not clear. There are also service level agreements which could be either of the above.

Charity fundraising events VAT made simple Charity fundraising events Can have up to 15 events of similar type in one year in one location Exclude small-scale events (<£1,000) Primary purpose must be raising money and must be promoted as such VAT exemption covers sales at event, sponsorship, advertising in programmes etc Excludes events where accommodation provided eg: challenge events Moving on to Fundraising activities ‘one off’ f/r events Includes dinners, auctions, golf days, shows etc Advertised as a f/r event All related income including ticket sales, advertising, sponsorship is exempt – you cannot choose Profits are not taxable No VAT on admission fees or registration charges BUT also No recovery of VAT on purchases Budget for all costs to include VAT cost Decreases overall VAT recovery for whole charity

Challenge events Agent or principal May need TOMS: HMRC guidance VAT made simple Challenge events Agent or principal May need TOMS: Only charge VAT on the margin Margin standard-rated if event in EU Margin zero-rated if event outside EU HMRC guidance More than two nights accommodation. Do not qualify as fundraising events How regular? Is this a business activity? Is charity organiser or agent? Tour Operators’ Margin Scheme Trading – subsidiary HMRC guidance published 31 July 2008 Charity agent - Travel company or tour organiser taking the risk and organising the event so that charity does not have financial risk Name of the tour organiser on event information and tickets etc Contract between charity and tour organiser specifies that the charity will be acting as agent Charity principal - Charity may, in fact, still be using a tour organiser, but the difference is that the charity is taking a financial risk – they have a contract with the tour organiser that commits the charity to a certain £ or a minimum number of participants. The same situation would apply if the charity were an undisclosed agent – i.e. participant thinks that they

VAT made simple VAT recovery Must be VAT registered. Depends on how the purchase is used: Full recovery if used wholly for taxable activities No recovery if used for wholly for non-business activities No recovery if used wholly for exempt activities – unless level of exempt activity is very small (“de- minimis”) Special rules for mixed use purchases

VAT recovery – mixed use purchases September 2006 VAT made simple VAT recovery – mixed use purchases Eg: overheads Called “non-attributable” or “residual” Apportion VAT to types of activity (non- business, exempt, taxable) Recover bit apportioned to taxable And recover bit apportioned to exempt if exempt activity is “de-minimis” Helen Elliott of Sayer Vincent

VAT recovery - apportionment VAT made simple VAT recovery - apportionment First apportion non-attributable VAT between business & non-business activities – the BNB method Next apportion business bit between taxable and exempt activities – the partial exemption method From 1 Jan 2011 can do in one step – a combined method. But no de-minimis allowance for combined methods

VAT recovery - methods Set rules for partial exemption method September 2006 VAT made simple VAT recovery - methods Set rules for partial exemption method Must use income as basis of apportionment – unless agree another method with HMRC No set rules for BNB method Combined methods must be agreed with HMRC Alternative approaches: Staff time, staff cost, user headcount, direct expenditure Helen Elliott of Sayer Vincent

VAT return Include only business income, expenditure and VAT i.e. September 2006 VAT made simple VAT return Include only business income, expenditure and VAT i.e. Exempt Taxable (zero, reduced and standard rated) Do not include non-business income, expenditure and VAT Helen Elliott of Sayer Vincent

Zero-rating purchases September 2006 VAT made simple Zero-rating purchases Available to all charities – even if not VAT registered. Charity tells supplier not to charge VAT. Supplier may require a certificate from charity Disabled access, equipment, vehicles etc Collecting tins, badges Medicinal products for health or care charities Advertising Some building services and purchases Helen Elliott of Sayer Vincent

Zero-rating - advertising September 2006 VAT made simple Zero-rating - advertising All charity advertising in third party media Includes recruitment, fundraising, public awareness, campaigns Any form of media But excludes: Direct mail Charity’s own media (eg: website, newsletters) as not third-party Helen Elliott of Sayer Vincent

Reduced rating - gas and electricity September 2006 VAT made simple Reduced rating - gas and electricity Available to all charities – even if not VAT registered. Charity tells supplier to charge VAT at reduced rate (5%) Available if: Fuel used for non-business activities, or Use is below certain levels, or If at least 60% used for non-business activities – whole fuel supply is reduced-rate Helen Elliott of Sayer Vincent

Property & VAT Complicated! Normal rule – sale, rent is VAT exempt September 2006 VAT made simple Property & VAT Complicated! Normal rule – sale, rent is VAT exempt If property is “opted to tax” - usually standard rated New buildings zero rated if for: Relevant charitable purpose or Relevant residential purpose Extensions generally standard rated Helen Elliott of Sayer Vincent

September 2006 VAT made simple Cross border supplies VAT rules where make sales abroad or purchases from abroad. Very complicated! Sometimes have to charge yourself VAT on purchases (“reverse charge”) Rules depend on: Whether goods or services For services – type of service Status and location of customer Helen Elliott of Sayer Vincent

September 2006 VAT made simple Contact details noelia.serrano@sayervincent.co.uk www.sayervincent.co.uk VAT made simple https://www.gov.uk/topic/running- charity/money-accounts VAT notice 701/1 Charities Helen Elliott of Sayer Vincent