28 June 2019
Significant changes have happened over the last 15 to 20 years in terms of governance, risk and cost reduction within the Charity and NFP sector. Examples include the increasing complexity of charity operations, increased use of the web, procurement protocols, fundamental changes to VAT accounting and an entire change of mindset when considering tax planning.
This blog considers some of these developments and some commentary on managing risk and reducing costs.
Charities don’t pay tax right?
Charities know that they do, but it is a common public misconception that they do not. This is not true - the tax burden is in place as even if no VAT is due on income, charities frequently bear VAT costs that cannot be recovered. There are no special refund schemes available to charities, unlike government departments and local authorities.
The extent of activities subject to VAT is increasingly wide and it is increasingly rare to find a reasonable-size charity that is not registered for VAT. For example, something as simple as sponsorship income - this is earned, not a donation - is a consideration and so within the scope of VAT.
Provide digital services - for example, online access for a fee - and you could be liable to register in every member state to account for the VAT due. There is a single registration option that collects and distributes the VAT due.
What’s the issue?
Most charity clients strive to get it right, but the rules are incredibly complicated. It is the one sector where there is no statutory method to determine apportionment to establish VAT recovery. Any method can be used, but it must be fair and reasonable - which is in the eye of the beholder, surely?
The reliefs available to mitigate VAT costs are many and varied. All are limited in application and need to be evidenced. They are frequently interpretive in scope and controls need to be exercised to ensure any certification is appropriate.
VAT litigation is relentless - continually changing the view of our simple tax and its application. We are constantly required to redefine the definition of business activities, the use of VAT incurred, the right to deduct, etc.
"So I made mistake - it was innocent"
And if it goes wrong? HMRC have a window to adjust that extends up to four years retrospectively. Penalties are typically 30% of the tax error, but can be as high as 100%.
If HMRC finds an error, you are likely to be issued with a copy of the Human Rights Act guidance before they seek to establish the level of care the taxpayer has exercised. This evidence is then collated and referred to a penalties team. You can appeal and ask for a suspension.
So what do I do?
Tax governance is important and on agenda. Many larger commercial organisations publish their tax strategies. This addresses reputational issues, provides a working framework, and is considered by HMRC to assess taxpayer attitude.
At a minimum, organisations should map processes and controls and show evidence of review and control. These are part of the proof that reasonable care has been exercised by the charity, which in turn is useful for trustees, auditors, and the revenue.
HMRC visits are intended to ensure you are accounting for the right amount of tax at the right time - but visits aren’t making sure you are minimising your VAT costs by claiming or reducing costs - they check that you are entitled to what you have claimed.
Simple steps
For our clients, we ensure that we work within the spirit of the law to:
- Employ risk management through compliance
- Reduce costs by maximising use of reliefs and applying case law where relevant
We meet our clients regularly without charge to ensure that they are able to discuss changes, issues, and future plans to have an informed view on the VAT implications. This allows us to flag areas of risk and opportunity.
Remember that HMRC visits are to ensure you are paying your taxes. You should ensure you balance that process by checking you are not paying too much. The money should be used for charitable purposes and not to bolster the treasury. Bear in mind that HMRC are a revenue raising department - have somebody on your side.
If you would like to discuss any of the issues mentioned above, please contact me or one of our Charity and Not-for-Profit Sector team.
Alternatively, fill out our contact form here.
