There is a general misconception that charities do not pay tax. This ignores the fact that VAT is frequently a cost for charities. In this blog we consider some of the reliefs that might be available to reduce the VAT cost and put more funding into delivering the charitable objectives. We also comment on VAT recovery as this is the only option available if no reliefs are available.
Background
While there are concessions and some reliefs, VAT is normally a direct cost for charities. This cost arises as charities are unable to recover VAT incurred in respect of their charitable activities. This contrasts with local authorities and other specified bodies (eg. academies) who are able to get full VAT recovery in respect of their non-business activities. Government departments can get recovery of VAT incurred in respect of specified contracted out services.
Charities can benefit from specific reliefs for the purchase of certain goods and services. This allows the application of the zero rate to those qualifying purchases. Specific reliefs for expenditure include:
- Advertising and Goods connected with raising donations
- Aids for the disabled
- Construction – Relevant Charitable Purpose (‘RCP’)
- Drugs & Chemicals for Medical or Veterinary research
- Equipment for producing ‘talking’ books and newspapers
- Lifeboats, slipways and launching and recovery equipment
- Medical and scientific equipment
- Medicinal products purchased by a charity engaged in the treatment or care of people of animals
- Rescue equipment – for charities providing first aid or rescue
- Resuscitation training models
These reliefs can clearly very focussed. However, they can be valuable. We were able to apply the advertising relief for a client and this resulted in a £200k saving.
The RCP relief applies to property and as such the savings can be significant if the relief can be applied. It is important to note that where an RCP certificate has been issued there must be less than 5% business use of the building. This use is monitored for a period of 10 years and if the 5% threshold is breached then this will result in a VAT charge.
Client example
We were engaged at an early stage to advise on a publicly funded property project with multiple stakeholders. We worked with the management team to implement a structure that facilitated recovery and managed risk. We were able to achieve a £9m saving and reduce the VAT cost by 95%.
VAT recovery methods
Where a charity has both business and non-business activities, it can only recover VAT that relates to the taxable business activities. This means restricting recovery and apportioning VAT incurred that relates to both business and non-business activities – e.g. professional fees etc. This means applying a VAT recovery method.
There is no prescribed method for non-business activities. The only requirement for a recovery method is that it meets the ’fair and reasonable’ test.
While not legally required, it can be prudent to agree a method with HMRC, particularly if the charity has complex operations or diverse income. Any method, approved or not, should be reviewed periodically to ensure it remains fit for purpose. If it does not, then HMRC are likely to demand repayment of VAT incorrectly recovered and issue a penalty.
How can you optimise VAT recovery?
Practical points to consider when looking to reduce VAT costs:
- establish what reliefs might be available
- check the basic requirements of HMRC and relevant guidance carefully
- do not assume ‘one size fits all’ – VAT is a transaction tax and transactions differ check attribution
- if using an income-based method, is the income correctly analysed
- can the VAT cost be taken out on other ways – simple planning
- plan ahead – it can be difficult to fix the past.
Any mitigation should complement activities, not create any meaningful changes to the objectives or accounting model. This is about improving the model.
Summary
Mitigating VAT costs requires proactivity. It can be easier to manage costs than try and fund it through additional income generation. We are hopeful there will be some tips in this article that will help reduce costs and your governance model.
The next step
If you have any questions regarding the above, please contact Sean Glancy on s.glancy@uhy-uk.com, Zehra Osman on z.osman@uhy-uk.com, or your usual UHY adviser.
