VAT on fundraised income
Should academies be paying VAT on money, goods or services received in the form of donations?
When raising money, academies need to consider whether the income they receive is outside the scope of VAT – because the money raised is freely given without anything expected in return – or if the income is in respect of a business activity. If it is the latter then academies needs to understand the VAT treatment and the potential impact this has on their VAT registration and recovery position.
In considering what constitutes ‘business’, you must ascertain whether a donor receives a benefit of substance. The donor might receive a simple acknowledgement of their gift, such as being named in a list of supporters, perhaps in a newsletter. But this would not, in HMRC’s view, be sufficient to constitute a benefit of significance and a reciprocal business arrangement.
For example, if a parent pledged £50 against a school’s crowdfunding campaign, and then received a thank you acknowledgement on the school’s website there would be no VAT implications. However, if the school was offering a free ticket to the quiz night in return for the pledge, this could be constituted as ‘business’, although it would depend on the individual circumstances.
In cases where a donor (or a sponsor) receives more than a mere acknowledgement – having their company logo displayed on a plaque; receiving some form of promotion; gaining access to performances; being offered use of facilities, for example – in return for its ‘donation’, this would constitute a business relationship and the supply by the academy would potentially be subject to VAT.
Donations of gifts or services
In addition to money gifted, goods or services might be donated in return for a benefit offered by the academy. With a reciprocal ‘business’ relationship, the treatment of supplies to and from the donor needs to be recognised, and the correct VAT treatment applied. This will inform the academy if the VAT registration threshold (£85,000 from 1 April 2018) has been breached, if VAT is chargeable to the donor/ sponsor and if an amount of VAT on expenditure must be restricted as a result of business income.
Let’s use the example of a local restaurant inviting a group of students to tour its kitchens, where no money changes hands, but the school promotes the activity to parents before and after the event, and secures press coverage. If the local restaurant does not expect any publicity and the school is simply telling the parents about this student activity then there would not be a reciprocal arrangement between the school and the business. Even if the restaurant were to be identified in the press coverage, this would be seen as a consequence of the school wishing to publicise the event rather than the restaurant, and therefore one could argue that any publicity is not a significant benefit for, and not expected by, the company.
However, if the restaurant expected to receive press coverage as part of the agreement then this could be considered a promotion service by the school, and that would be subject to VAT (if registered).
Ascertaining taxable value
Another important point to note when considering donations is that amounts paid may clearly be in excess of the value of what is being provided by an academy. Any payment that is obligatory in order to receive the supply by the academy will likely be regarded as ‘business’ income. If an academy wishes the fundraising income it receives not to fall into the realms of business then it is important to ensure that donations and grant amounts received are distinguishable from the value of goods and services provided by a donor. If, for example, a grant does not make clear the proportion of the payment that is for the services received, the entire grant payment will be regarded as the consideration for the services the donor receives.
Having established whether there is a business activity and a supply, the academy then needs to consider what the treatment of its supply
will be. Advertising and promotion would be taxable at 20%, but the sale of tickets to a performance, a one-off fundraising event promoted in aid of the charity, or use of a hall or sports facilities, could be exempt from VAT. But there are specific conditions attached to exemptions.
What the above means in practice is, firstly, that sponsorship income, for example, would contribute towards the VAT registration threshold. Sponsorship income received from a business that can recover VAT is usually a very good thing for charities as it helps to improve their recovery of overhead VAT, but that might not be the case for academies. Business income, whether taxable or exempt, will give non-VAT registered academies a VAT recovery issue on overhead VAT, because business-related VAT is irrecoverable from HMRC. And for VAT-registered academies, the presence of exempt income from fundraising would obviously have an impact on the ‘partial exemption’ calculation. The amount of VAT we are talking about should be relatively small, but the exposure of not registering at the appropriate time and charging VAT to a sponsor could be of concern.
Let’s say that an academy receives £1,000 from a local business towards a new whiteboard – in return, the business receives publicity on the school’s website, in newsletters and via social media. For a VAT-registered academy, VAT would be charged to the local business and if there were any VAT directly incurred in promoting the sponsor then this would be recoverable from HMRC under the VAT return filing process.
The purchase of the whiteboard itself would relate to the non-business education and so the VAT incurred in that respect would also be recoverable. For a non-registered academy, this income might just push them over the registration threshold, but assuming not, no VAT would be charged (as the academy would not be registered). Any VAT incurred directly in promoting the sponsor would be, at least in part, irrecoverable, as business-related VAT incurred is not recoverable (unless registered for VAT). Overhead VAT would be affected slightly if the academy uses income as a method for calculating how much of its overhead VAT relates to business activities.
Charities generally have difficulty in deciding on the treatment of grant funding. While core grants for education are non-business and fall outside the scope of VAT, a decision needs to be made for other sources of funding – whether they are seen as ‘grants’ or whether they may in fact be contracts for services.
As with donations, the key question is whether the grant giver expects something of substance in return for the grant of money. The fact that an agreement is termed a ‘grant’ or a ‘contract’ is not decisive; what is important is whether there is a reciprocal arrangement, or whether the grant giver benefits, perhaps by having one of its obligations discharged. Grants are outside the scope of VAT because the money is freely given, whereas contracts will either be taxable or exempt, depending on what is supplied to the grant giver. This, in turn, will affect the recovery position for VAT on expenditure. In plain terms, if a school receives a £40,000 grant from a foundation to renovate its science labs, this would fall outside the scope of VAT as the grant would be freely given, with the grant giver receiving nothing of substance in return.
VAT for the education sector is a complex subject and cannot be covered in detail here. We therefore recommend that you seek specialist professional advice.
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