Taxation & VAT Update Ros Clarke, Tax Manager & Alison Birch, Senior VAT Manager North West Housing Conference: Friday 4 November 2016

Agenda Corporation Tax VAT SDLT Interactive Case Studies Trading subsidiaries Q & A

Charitable Exemption to Corporation Tax There is a general exemption for charitable trade contained within Part 11 of Corporation Tax Act 2010 Exemption for trading income in respect of the profits of any trade carried on by a charitable company, if the profits are applied solely to the purposes of the charitable company and either: The trade is exercised in the course of the actual carrying out of a primary purpose of the charitable company; or The work in connection with the trade is mainly carried out by beneficiaries of the charitable company

Allowed Non-Charitable Income The only exemptions to the above are: Turnover is: Less than £5000; or Whichever is the lesser of £50,000 and 25% of all of the charitable company’s turnover for the accounting period Under charity law, it may be permissible for charities to carry out activities which are taxable

Non-Charitable Expenditure If a charity incurs non charitable expenditure, income equivalent to this is taxed Examples: A non-charitable trade incurs a loss, loss is taxable income A loan is made for non charitable purposes, loan amount is taxable income Developing properties for non charitable purposes is taxable.

The Joint Guidance Produced by HMRC, HCA and Charity Commission Gives examples of taxable activities in relation to rent, shared ownership and outright sale Each household has to be assessed for charitable need Provides a clearance mechanism which provides certainty Only to be used where there is doubt

Problem Areas Keyworkers – regional issues - affordability Shared ownership LCHO Assessing charitable need Other income

VAT: Liability of supplies VAT is a significant cost and burden for social housing providers due to the different VAT liabilities of the transactions: Affordable housing – exempt Sale of housing – taxable or exempt Shared ownership – taxable and exempt Commercial – taxable or exempt Repairs to properties – taxable or exempt Refurbishment of stock from LAs – taxable Back office services to other HAs - taxable

VAT: Recovery VAT can only be reclaimed to the extent that it relates to taxable supplies: Costs relating to exempt supplies – not recoverable Costs relating to taxable supplies - recoverable Costs relating to non business income/activities – not recoverable Costs relating to all activities – residual Partial exemption calculations need to be undertaken to determine how much VAT on overhead costs can be reclaimed

VAT: Complex Areas Reducing irrecoverable VAT Joint contracts of employment Costs sharing exemption VAT grouping Qualifying conversions Option to tax

SDLT There is a general charitable exemption Land needs to be used for charitable purposes Exemption will be disapplied if land not used for charitable purposes.

Some Illustrative Case Studies…

Case Study 1: Scheme with 20 houses for social rent plus 4 commercial units 2 commercial units let to charities

Case Study 2 Office accommodation purchased with surplus space Surplus space will be let at market rent Meeting room will be hired out as a conference facility with services provided

Case Study 3: Redevelopment of a redundant industrials site alongside commercial and leisure space 160 new homes – 50 social rent, 50 shared ownership to eligible charitable beneficiaries, 60 outright sale Income from outright sales makes scheme viable

Commercial Subsidiary 100% owned/controlled by the Charity Non charitable trade should be in the subsidiary Taxable surplus can be gift aided Taxable surplus may be significantly higher than accounts surplus with adjustments for depreciation, grant amortisation and revaluations Amount needs to be paid within 9 months of year end

Commercial Subsidiary: Further Considerations Consider how funding is to be provided – commercial interest rate – loads from charity may be deemed non charitable expenditure Gift aid of surplus may drain working capital requirement for loan repayment or future investment Tax is likely to be payable to some extent VAT and SDLT implications also arise

Governance requirements All new activities/housing schemes should be reviewed to determine if they are charitable Any non charitable activity structured in subsidiary Annual review of current schemes to ensure they still comply with charitable trading e.g. shared ownership

Any Questions?

Thank you for your time!

Any questions? Please contact: Ros Clarke Alison Birch Tax Manager 0151 255 2300 Ros.clarke @mitchellcharlesworth.co.uk Senior VAT Manager 0161 817 6100 Alison.birch @mitchellcharlesworth.co.uk