Charities: Have you reviewed your VAT position recently?

What a year it has been so far. The COVID-19 pandemic measures have affected us in so many ways and VAT is no exception. Charities have some of the more complex VAT positions as they have a mixture of income – non-business, taxable and exempt and these mean that any changes need to be reviewed in perhaps more detail.

The COVID-19 pandemic has created a few areas which may need to be reviewed:

1. Apportionment of VAT

A lot of charities have non-business activities and there is no entitlement to claim VAT incurred in undertaking these activities.

Those that have business activities are often exempt from VAT. These benefit the customers as no VAT is charged but, as with non-business activities, there is no entitlement to claim VAT incurred in undertaking these activities.

Only taxable business activities have this entitlement. Typical taxable business activities for charities are shops, attractions, events, and cafes. These can be a welcome source of additional income to support the charity and boost the ability of the charity to claim VAT on the general running costs.

However, like many other businesses, the lockdown measures and general downturn in trade has meant that it is these business activities which have stopped or decreased dramatically. For a retail business, for example, this has no VAT impact but for a charity which has a mixture of income sources, this could have a significant impact especially if the non-business and exempt activities (the core business) remains fairly static whilst the taxable business income decreases. This is because the apportionment calculations are normally based on relative turnover of the respective parts. This becomes even more relevant if there is any large expenditure, such as on property.

HMRC acknowledge that this can be an issue for particular sectors but, whilst generally sympathetic have, so far, been reluctant to address it en masse. Each charity will need to review its own position and consider whether its VAT recovery position is affected and, if so, what, if anything, it can do to address the issue.

It may be necessary to agree a temporary special method with HMRC for a period of time or if the impact is significant it may be possible to utilise the partial exemption override provisions.

2. Branching out

Many businesses have seen opportunities to generate revenue during the pandemic such as diverting production of alcohol for drinks to the production of gels for sanitisers and charities are no different. However, care must always be taken when undertaking any new business opportunity so that the VAT position is understood.

In particular, many events have moved online. Educational establishments for example have started to harness the power of working from home and the capabilities of their education delivery to deliver online training. Depending on the nature of the training provided and the recipient there could be VAT implications which may not be the case on a face to face basis and there may even be a requirement to register and account for VAT in the EU if the recipients are EU based

If VAT is payable on any new venture it is important to determine this from the outset so that there are no surprises at a later date. The corporate tax implications should also be considered.

3. Grants vs contracts

A perennial problem for many charities is whether the income they are receiving is a grant or a contract for services and if it is a contract for services, whether it is exempt or subject to VAT. COVID-19 has not particularly changed this but there are a lot of grants and reliefs being made available as a result of the pandemic.

Charities are often used as conduits for grants and may become a part of the supply chain rather than a receiver or giver of grant. To the extent that VAT may be due on any payments received or distributed there could be a 20% cost which should not fall on the charity.

Care needs to be taken to ensure that the nature of the arrangement is understood in full, including the VAT implications.

If you would like to discuss the topics explored in this article, contact Colin Laidlaw.