Most charities have a diverse range of income sources, including donations, grants and trading income - all with different VAT treatments.
What are the VAT implications of this? And why is the correct VAT treatment important? We answer your questions below.
Why does it matter?
Charities are obliged to determine the correct VAT treatment of income, which counts towards the VAT registration threshold where this income is taxable. The obligation to correctly account for VAT rests with the charity. Inevitably, there are penalties for a failure to comply, in addition to a tax liability that can extend to 20 years historically.
In addition to financial costs, there are reputational risk issues. These are as important and will be front of mind of trustees as well as management.
VAT treatment - the headlines
Grants freely given are outside the scope of VAT. If the grant supports a non-business activity, then that activity does not result in an entitlement to recover VAT.
This contrasts with a supply for a consideration, where something is given in return for a payment. This is likely to fall within the scope of VAT. The rules are widely drawn. Supplies would include, for example, some public charity fundraising activities - eg. a charity organised parachute jump with a minimum donation.
Income from public bodies
There has been an increasing shift to a procurement model in the public sector, when previously, monies would have been provided as a grant. Where the money is provided under a contractual arrangement, this is likely to result in the payment being subject to VAT.
This is a fundamental change to the VAT consequences, and while it could be beneficial for the charity, the VAT accounting must be considered at an early stage. It could also dilute the amount of money available when funding is provided by government departments.
Implications
The VAT treatment of income is critical to determining the VAT accounting obligations for a charity. The obligation to account for VAT on taxable income is mandatory.
If registered for VAT, there is a right to deduct VAT incurred on costs relating to qualifying activities. Calculating VAT recovery needs proper consideration. There is no statutory mechanism to calculate VAT recovery in respect of business and non-business activities, which contrasts with partially exempt organisations.
The takeaways
All charities need to properly review income, and any changes to the terms and conditions on which funding is provided needs to be fully considered.
Unlike the normal correction (look back) period for VAT-registered entities, if an entity is not VAT registered, then the correction period can extend to 20 years. That can result in an obligation to account for VAT and penalties over a significant period of time and can lead to unexpected financial implications.
How we can support you
At UHY Hacker Young, our advisers are highly ranked to the charity and not for profit sector. We can undertake VAT reviews and offer a support service for our clients. This is evidence of reasonable care for HMRC, and provides assurance to management and trustees that tax risk is being appropriately managed.
Please get in touch with Sean Glancy or using the form below, if you have any questions regarding the above.
