This looks at when a charity can buy advertising or construction without paying VAT; when a charity must register for VAT; the cultural exemption and what a VAT-registered charity must do when seeking to reclaim VAT.

1. VAT & CHARITIES: CLARITY ON VAT
REGULATIONS & OPPORTUNITIES
J L Grant & Co
30 April 2014

2. VAT AND CHARITIES – A BRIEF
OVERVIEW
• VAT as an expense
• VAT registration for charities
• VAT recovery
• Imported services
• The penalty regime

3. VAT AS AN EXPENSE
• Always buy without VAT rather than try to
claim it back later
• Reduced-rating
• Zero-rating
• Business/non-business central issue

4. REDUCED RATED SUPPLIES
• Fuel and power
– Non-business
– 60% tolerance
– Small consumption treated as domestic

5. ZERO-RATING TO CHARITIES
• Advertising
• Construction of new buildings or annexes

6. ZERO-RATED ADVERTISING
• Somebody else’s space or time
• Must target general public
• Design and production components of
qualifying advertising
• Books, children’s clothes?

7. WHAT’S IN?
• Television & radio
• Cinema
• Billboards
• Sides of vehicles
• Newspapers and magazines
• Third party websites
• Pay per click sponsored links on search
engine websites

8. WHAT’S OUT?
• Direct mail and telesales
• Own Christmas cards
• Exhibition stands or space
• Pens and adult clothing
• Design of own website
• Services of copywriters and designers for
search engine optimisation purposes
• Components of the above

9. ZERO-RATED CONSTRUCTION FOR
CHARITIES
• Buy freehold or long lease in new building
• Buy construction services to create new
building
• “Solely” for relevant charitable purpose
• Annexes
• Reliefs for listed buildings abolished
• Dwellings, residential buildings

10. RELEVANT CHARITABLE PURPOSE
• For non-business purposes
• For village halls
• Part or whole of a building – solely
remains test
• “Solely” allows for de minimis
• Per HMRC de minimis not more than 5%
• Certificate
• 10 year review period

11. BUSINESS
• Provision of goods and/or services to third
parties for consideration on an on-going basis
• Profit or motive immaterial (Fuchs)
• Direct link
• Means testing (Wakefield College)
• Ignore internal transactions
• Outsourcing local authorities and health
boards

12. HOW TO MEASURE 95%
• HMRC will not approve upfront
• Accurate
• Not unduly burdensome
• Readily verifiable by HMRC
• Possible approaches:
– Staff ratios
– Commercial/total funding
– Time
– Floor areas

13. FLOOR AREA EXAMPLE 1
FAILS 95% TEST

14. FLOOR AREA EXAMPLE 2
PASSES 95% TEST

15. VILLAGE HALLS
• Reflects pressure from WI in late 1980s –
difficult to sustain outside classic Home
Counties model
• Per HMRC, how organised rather than
type of activities
• Expect village hall committee and village
hall trustees

16. VAT REGISTRATION AND CHARITIES
• Business?
• Growth of outsourcing
• Supplies taxable at standard, reduced or zero
rate
• Services imported for business purposes
• Exemption from registration if all zero-rated
(e.g. sales of donated goods)
• Exception from registration
• Non-established persons – no threshold
• Penalties

17. OUTSOURCED SERVICES – WHEN IS
THE ACTIVITY BUSINESS?
• Wording of service level agreements (“SLAs”)
unhelpful and not conclusive
• More likely non-business where:
– Charity would have carried out the activity anyway
– The charity applied for a grant
– The SLA only stipulates “good housekeeping”
• More likely business where:
– The public body would otherwise have had to provide
the service itself and so derives a direct benefit
– There is negotiation on terms and conditions

18. CHARITIES AND VAT EXEMPT
SUPPLIES
• Education and vocational training
• Welfare services
• Cultural services

19. CULTURAL SERVICES
• Public body or eligible body
• Museum, gallery, art exhibition or zoo
• Theatrical, musical or choreographic
performance of a cultural nature
• What is an eligible body?
• What is cultural?

20. WHAT IS AN ELIGIBLE BODY?
• Non-profit-distributing
– Rules and practice
– Cultural charities may still make grants or donations
in pursuit of their wider charitable objectives
• Ring-fenced profits
– Used for continuance or improvement of the exempt
cultural facilities; or
– Applied in connection with related cultural supplies
(e.g. research or conservation)
• Managed and administered on voluntary basis by
persons with no direct or indirect financial interest
in its activities

21. VOLUNTARY BASIS - 1
• Decision-making body of last resort (e.g.
board)
• Not those who implement on daily basis
• Actual not potential financial interest
– Payments above market rate or profit-related
plus
– direct link between those payments and role
in directing the body’s activities

22. VOLUNTARY BASIS - 2
• Trustee employed as orchestral player or
theatre director could scupper exemption
• Bournemouth Symphony Orchestra not an
eligible body because managing director with
£80k salary was member of board
• Guarantor who can only make a loss has no
financial interest (Longborough Festival
Opera)
• Employee without voting rights not a problem

23. CULTURAL?
• Film?
• Erotic Center BVBA v Belgium
– Reduced rate
– Not a cinema
• British Film Institute
– Imminent hearing by Upper Tribunal

24. GETTING VAT BACK
• Identify VAT that relates directly to
– Non-business activities (disallow)
– Taxable business supplies (claim)
– Exempt business supplies (disallow unless de
minimis)
• Apportion VAT that relates both to
business and non-business (BNB method)
• Apportion residual input tax (partial
exemption method)

25. BNB AND PARTIAL EXEMPTION
• Must do BNB calculation first to identify input
tax
• May be on any fair and reasonable basis
• Can ask for HMRC approval so long as you
make no exempt supplies
• If BNB and partly exempt, HMRC can only
approve a “combined method”
• Combined method means:
– Less calculations
– Lose de minimis

26. PARTIAL EXEMPTION
• Standard method based on ratio of taxable to
total turnover
• Anything else “special” and needs HMRC
approval
• Special methods may be based upon:
– Transaction numbers
– Staff time
– Inputs or input tax
– Floor area
– Cost centres
– Management accounts

27. BNB/PARTIAL EXEMPTION –
EXAMPLE 1
• Charity A has two main activities:
– Taxable consultancy projects in its areas of expertise
– Other activities in pursuit of its charitable objectives
and funded by grants and donations (non-business)
• Charity A must:
– Identify VAT directly attributable to non-business
activities and disallow it
– Identify input tax directly attributable to consultancy
and claim it
– Apportion balance between business and non-
business
• Can seek HMRC approval for its BNB method

28. BNB/PARTIAL EXEMPTION –
EXAMPLE 2
• Charity B has three main activities:
– Taxable consultancy projects in its areas of expertise
– Exempt training courses
– Grant-funded non-business activities
• Charity B must:
– Identify VAT directly attributable to non-business activities and
disallow it
– Identify input tax directly attributable to consultancy and claim it
– Identify exempt input tax and disallow it; and
• Either:
– Obtain HMRC approval for a combined method; or
– Use a BNB method to identify input tax; and
– Use standard or special method to apportion input tax

29. THEATRE PRODUCTION COSTS
• HMRC do not regard these as residual
unless theatre has contracted to
– Secure sponsorship for clearly defined run of
events or clearly defined period; or
– Tour the production; or
– Record for later sale on CD or similar
• Securing general corporate sponsorship or
catering supplies insufficient
• Special method?

30. IMPORTED SERVICES – A WARNING
• Example: charity buys search engine
optimisation services from a Dublin-based
supplier
• Not zero-rated if bought in the UK because
they relate to charity’s own website (own
space and time)
• VAT treatment will depend upon
– Whether charity is VAT-registered; and
– Whether it buys the services for business
purposes

31. SERVICES IMPORTED BY A VAT-
REGISTERED CHARITY
• Supplier will not charge VAT
• Whether bought for business or otherwise
• A VAT-registered charity will be treated as
supplying the services to itself
• Charity must charge itself VAT in its return
(reverse charge)
• No reclaim unless it relates to taxable
business activities

32. SERVICES IMPORTED BY A CHARITY
NOT REGISTERED FOR VAT
• If charity buys for business purposes:
– The supplier should not charge VAT but often
in practice they will
– The cost of the services will count towards the
VAT registration threshold for the charity
• If charity buys for non-business purposes:
– The supplier should charge VAT (in this
example Irish VAT)

33. PENALTIES FOR INACCURACIES
• Quality of disclosure –unprompted or
prompted?
• No penalties if you show reasonable care
• Careless, deliberate or deliberate and
concealed?
• Range from 0% to 100%
• Mitigation for telling, helping and giving
access

34. WHAT IS REASONABLE CARE?
• Different standards for multinational
companies and sole traders
• Have you done research/sought professional
advice in relation to unfamiliar transactions?
• Where do charities sit in the spectrum? (Bilal
Jamia Mosque)
• Deliberate not same as dishonest
• Level of care and prudence expected from
Trustees – risk of further repercussions

35. T: 07787 576783
E: thd@terrydockley.co.uk
W:www.terrydockley.co.uk

36. VAT AND CHARITIES – WHAT YOU
NEED TO KNOW
These slides are intended for use in connection with the
presentation given on 30 April 2014. No action should
be taken on the basis of information contained in these
slides or in the presentation without obtaining
professional advice specific to the circumstances.
No responsibility for loss occasioned to any person
acting or refraining from action as a result of the material
in these slides or presentation can be accepted by the
speaker or by Terry Dockley & Co Limited.
Copyright 2014, Terry Dockley & Co Limited