1. VAT & Cultural Services, & VAT & Fundraising Bill Lewis 8 November 2012

2. VAT & Cultural Services Admission charges by a public body or an “eligible body” to:  A museum, gallery, art exhibition or zoo, or  A theatrical, musical, or choreographic performance of a cultural nature Are exempt from VAT

3. What is a public body?  Local authorities, government departments, and certain non-departmental public bodies listed in the Cabinet Office publication “Public Bodies”.  But – VAT exemption does not apply if the public body will distort competition to the disadvantage of a commercial provider, or enters into a joint venture with a commercial provider.

4. What is an eligible body?  Precluded from and does not distribute profits  Applies profits from admission charges to continuance and improvement of facilities for the paying public  Is managed and administered on a voluntary basis

5. HMRC Historic View  If there were paid managerial and administrative staff then an organisation was not run voluntarily..

6. HMRC Revised View:  But HMRC lost this argument in a case against London zoo which determined that “managed and administered on a voluntary basis” meant those who ran the organisation at the highest level, particularly re policy and financial matters Provided trustees/management committee are unpaid then the organisation is run voluntarily.

7.  This means that persons who participate in the highest management and administration must not have a direct financial interest in the results of the organisation – whether by remuneration, salary, or any other financial interest.  So if there is a paid trustee or paid member of the senior management team the exemption does not apply.

8. Bournemouth Symphony Orchestra Case  But, this case showed that for a person to have a direct financial interest in an organisation they need to be paid above the market rate, or paid a profit related bonus for their work in the direction of the cultural body’s activities

9. To VAT Exempt or Not VAT exempt?  Charitable cultural service providers can choose to be VAT exempt or not.  VAT exemption can be broken by having a paid trustee – e.g. Artistic director who receives a profit related bonus  Whether to break the exemption depends on income levels and costs. E.g. Might be worthwhile if there are major capital works and you want to recover VAT.

10. Other considerations  VAT exemption only applies to entry fees. Other activity still subject to VAT – e.g.  Fees paid for when you tour productions.  Tickets you sell as agents for others productions

11. VAT Incurred on Costs  VAT exemption restricts your ability to recover VAT incurred on your costs. If you have other VAT taxable income you can partially recover VAT incurred on your costs. HMRC will argue that VAT ticket sales means that VAT incurred on the cost of productions cannot be recovered. NB Mayflower Theatre case.

12. Tax, VAT & Corporate Sponsors  Pure donations are outside the scope of VAT and not subject to tax in the hands of the charity – but how often is a payment from a corporate supporter a pure donation?

13. Tax, VAT & Corporate Sponsors For example corporate might want:  Website links  Display of logo and Corporate Colours  Descriptions/endorsements of its products and services  Use of charity’s mailing list  Right to sell goods on the charity’s premises/website

14. Tax, VAT & Corporate Sponsors Other examples of what a corporate might want:  Volunteering experiences for staff  Staff training Can you think of other examples?

15. Tax, VAT & Corporate Sponsors Providing such benefits to corporate supporters in return for their support will mean that their donations are treated as fees subject to tax and VAT.

16. What to do?  Split payment between donation to charity and fee subject to VAT to trading company. Fee is commercial value of sponsorship.  Or fee of 10% of sponsorship is usually safe if no known commercial value.  Smaller fee if sponsorship huge but benefit to sponsor small.  Bigger fee if benefits huge

17. Know Your Corporate  Bear in mind that most corporate supporters can recover any VAT you charge them, but those whose services are VAT exempt cannot – in particular banks and insurers. Charging VAT hurts them  On a practical level many CSR employees of big companies see VAT as an extra cost when in most cases the company can recover it. Have them talk to their Finance people.

18. Examples to discuss  Soft drink company’s support of a childrens charity in return for various benefits.  Name and logo of corporate appearing in annual report of charity and nothing else  Website links between charity and corporate and nothing else

19. How can I have my cake and eat it? Alternative solution. Corporate makes a pure and unconditional donation to the charity, which without any obligation to do so gives publicity etc to the corporate. Nothing in the grant agreement or correspondence or emails between charity and corporate indicates that publicity must be given. Payment remains a tax and VAT free donation. BE VERY CAREFUL WITH THIS ROUTE.

20. Bill Lewis Tax Consultant Bates Wells & Braithwaite London LLP 2 – 6 Cannon Street London EC4M 6YH Tel: 020 7551 7777 E-mail: b.lewis@bwbllp.co.uk