UKCF Conference September 2017

UKCF Conference September 2017
VAT: A Practical Guide Geraint Lewis: Kingston Smith LLP

"VAT will be a simple tax on the supply of goods and services.“ (Anthony Barber MP, Chancellor of the Exchequer 1972)

"VAT will be a simple tax on the supply of goods and services.“ (Anthony Barber MP, Chancellor of the Exchequer 1972) “Beyond the everyday world … lies the world of VAT; a kind of fiscal theme park in which factual and legal realities are suspended or inverted.” (Lord Justice Sedley 2001)

“Do you know what Mrs Thatcher did in her first budget? Introduced VAT on yachts!!! It somewhat spoiled my retirement”

“Do you know what Mrs Thatcher did in her first budget? Introduced VAT on yachts!!! It somewhat spoiled my retirement” Edward Heath 1990

VAT On Income Grants vs Supplies AKA When is a grant not a grant? VAT Relief on charity costs

UKCF Conference September 2017: VAT on Income
Unlike other taxes there is no “universal exemption” for charitable income. For many charities VAT is a significant cost both financially and in staff resourses.

Understanding the terminology:

Understanding the terminology: VAT Exempt Income

Understanding the terminology: VAT Exempt Income Zero Rated Income

Understanding the terminology: VAT Exempt Income Zero Rated Income Non- Business income

VAT Exempt Income: Specific items, listed EU legislation, which the UK MUST adopt (at least until after Brexit) UK legislation must be in accordance with EU law Exemptions must be interpreted narrowly Should not create a “distortion of competition”

VAT Exempt Income: Examples Education and Vocational Training.

VAT Exempt Income: Examples Education and Vocational Training. Health, and Welfare inc some types of “social care”.

VAT Exempt Income: Examples Education and Vocational Training. Health, and Welfare inc some types of “social care”. Membership subs to certain Public Interest Bodies.

VAT Exempt Income: Examples Education and Vocational Training. Health, and Welfare inc some types of “social care”. Membership subs to certain Public Interest Bodies. Sporting and cultural services provided by NFP bodies.

VAT Exempt Income: Examples Education and Vocational Training. Health, and Welfare inc some types of “social care”. Membership subs to certain Public Interest Bodies. Sporting and cultural services provided by NFP bodies. Insurance.

VAT Exempt Income: Examples Education and Vocational Training. Health, and Welfare inc some types of “social care”. Membership subs to certain Public Interest Bodies. Sporting and cultural services provided by NFP bodies. Insurance. Financial Services.

VAT Exempt Income: Some of the VAT exemption commonly used by charities (e.g. education, sporting and cultural services and welfare) are not automatic exemptions. As well as being a charity the provider, or the customer need to pass some other eligibility test, to benefit from the exemption.

VAT Exempt Income: For example education is only exempt when provided by an eligible body as per the legislation. Which for charities means that you need a specific written provision which prevents any surplus arising from education being used to support other activities, even if these are charitable.

VAT Exempt Income: Exemption = No VAT on income, but no VAT recovery on costs, so in some cases its not the best answer, and typically creates a VAT cost somewhere in the chain.

Zero Rated Income Essentially a “political fudge” negotiated by the UK in 1973 to limit the impact of VAT in certain “sensitive” parts of the economy. Income is subject to VAT but the rate applied is 0% The UK cannot introduce any new 0% items or extend existing 0%, without EU agreement (which is unlikely). After Brexit scope extend of the zero-rate, but is this likely in the short term?,

Zero Rated Income Examples: Food for human consumption.

Zero Rated Income Examples: Food for human consumption. Children's clothing.

Zero Rated Income Examples: Food for human consumption. Children's clothing. Books, magazines etc.

Zero Rated Income Examples: Food for human consumption. Children's clothing. Books, magazines etc. Construction of new houses etc.

Zero Rated Income Examples: Food for human consumption. Children's clothing. Books, magazines etc. Construction of new houses etc. Passenger transport.

Zero Rated Income Examples: Food for human consumption. Children's clothing. Books, magazines etc. Construction of new houses etc. Passenger transport. Sale of donated goods by a charity.

Zero Rated Income: Zero-Rate = No VAT charged on income but VAT recovery on costs, assuming supplier is VAT registered. So can be efficient, and unlike exemption offers a no cost option.

Zero Rated Income: However although no VAT due to HMRC, Zero-rate income is still classed as “taxable income” when looking at VAT registration.

Non-business income: The most difficult category to understand, and to define. VAT definition of business is very wide, certainly much border than in charity law, not linked to primary purpose

Non-business income: In simple terms means income that does not consideration of a supply of goods or services, includes:

Non-business income: In simple terms means income that does not consideration of a supply of goods or services, includes Grants and Donations (but be careful). Certain Statutory charges.

Non-business income: Non-Business Income= No VAT on income, but no VAT recovery on costs, so in some cases its not the best answer, and typically creates a VAT cost somewhere in the chain.

When is grant not a grant?
UKCF Conference September 2017: When is grant not a grant?

What is or is or is not a grant for VAT is probably the single most common question asked by my NFP clients.

UKCF Conference September 2017: VAT on Income Grants vs Contracts for Services
Source of friction between the NFP sector and HMRC. HMRC will (and do) argue whatever gets them the best answer i.e most revenue Changes in funding structures and funders looking for greater control, transparency etc makes this an increasingly complex area. Calling something a grant is not enough Accounting treatment is not decisive,

What are the key characteristics of a grant or donation for VAT? Freely given with no expectation of anything in return, and no obligation on the recipient to do anything.

Existence of a formal contract, and of mutual obligations, if you have a formal contract or agreement you start to move away from HMRC’s standard position. Wording like “the charity will provide XXXX to the funder” or “in return for the funding the charity shall undertake XXXX” are not helpful

Presentation is important, if something is called a “service level agreement” or describes the organisation receiving the funding as the “service provider” then convincing HMRC that the funding is a grant is going to be a struggle.

In simple terms the more you link the payment of funds to the completion of certain tasks etc, the greater risk of HMRC taking the view that the arrangement is a supply of services and therefore VATable (unless a specific exemption applies)

So what can be done to manage the risk? Recipient to approach the funder first

So what can be done to manage the risk? Recipient to approach the funder first. Documentation from the funder talking about support for ”your project” or similar.

So what can be done to manage the risk? Recipient to approach the funder first. Documentation from the funder talking about support for ”your project” or similar. Provisions for unspent funds to be returned.

So what can be done to manage the risk? Recipient to approach the funder first. Documentation from the funder talking about support for ”your project” or similar. Provisions for unspent funds to be returned. Payments to be made periodically rather than linked to completion to tasks.

Other Considerations Is treating something as a grant and therefore not subject to VAT always the best answer?

Other Considerations Is treating something as a grant and therefore not subject to VAT always the best answer? Part grant part sponsorship

Other Considerations Is treating something as a grant and therefore not subject to VAT always the best answer? Part grant part sponsorship Project management fees

VAT on Charity Costs

UKCF Conference September 2017 VAT on Charity Costs
In the main charities pay VAT on costs like any other organisation. However there are some specific area where charities can either avoid paying VAT or pay a reduced amount of VAT.

Property Costs Fuel and Power Advertising Services

Property Costs If a landlord has “opted to tax” a building then VAT is due on rent, commercial tenants would have no choice but to pay.

Property Costs If a landlord has “opted to tax” a building then VAT is due on rent, commercial tenants would have no choice but to pay. However, a charity can issue a “certificate of relevant charitable purpose” to prevent the landlord charging VAT.

Property Costs However, certificates can only be issued when the property is being used for “non business purposes”, so occupancy by a charity is not enough!!!!

Property Costs However, certificates can only be issued when the property is being used for “non business purposes”, so occupancy by a charity is not enough!!!! Penalties for issuing incorrect certificates.

Property Costs Similar provisions for new builds, but again only when used for non business purposes, or as a village hall or similar.

Property Costs Similar provisions for new builds, but again only when used for non business purposes, or as a village hall or similar. No relief for extensions or refurbishments. However very specific relief for a “relevant charitable annex”.

Fuel and Power VAT charged at 20% on supplies of fuel and power to most business customers. However, charities using fuel and power for non business purposes and pay VAT at 5%.

Fuel and Power VAT charged at 20% on supplies of fuel and power to most business customers. However, charities using fuel and power for non business purposes and pay VAT at 5%. Again certificate is usually required (although not strictly necessary).

Advertising Advertising services are normally subject to VAT at 20%.

Advertising Advertising services are normally subject to VAT at 20%. However, wide ranging zero-rate relief for most advertising services and related goods supplied to a charity.

Advertising Advertising services are normally subject to VAT at 20%. However, wide ranging zero-rate relief for most advertising services and related goods supplied to a charity. Again most suppliers will require a certificate

Advertising Generally does not matter what is being advertised or how.

Advertising Generally does not matter what is being advertised or how. Does not cover advertising on own website etc. Does not cover direct marketing etc

VAT: A Practical Guide Geraint Lewis: Kingston Smith LLP

UKCF Conference September 2017

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