O ver the past two years, the cloud of the COVID pandemic has meant many charities and businesses in the not-for- profit sector have had to make a pivot in the services they offer. However, a change in the services offered can have unintentional VAT consequences. Charities have been hit with a multitude of challenges as a result of the pandemic. In many cases, income has contracted because of a reduction in the availability of grant funding, while sales and fundraising activities have been impacted by the various lockdowns and other COVID related restrictions enforced upon the population. At the same time there has been an increasing need for charities and other organisations to step in and help vulnerable groups who have been heavily impacted by this once-in-a-generation event. These pressures have caused many charities to alter, decrease or increase the services they offer. Whilst this can be beneficial in helping the organisation plug a hole in their finances, care needs to be taken to ensure that VAT is accounted for correctly. Given the complexities of the VAT legislation, even a small alteration in the services offered can lead to markedly different VAT liabilities.
With multiple different income streams, if can be difficult to
Where a charity undertakes supplies which are both taxable and exempt for VAT, their ability to recover VAT incurred on expenses will fall under the Partial Exemption provisions. These calculations can be complex, and care needs to be taken when looking at VAT recovery. During the course of the past 18 months, the tax team at Scrutton Bland has seen a noticeable increase in the number of HMRC investigations opened to look into the VAT affairs of charities and organisations in the not- for-profit sector. These investigations can start off with a simple request to check a small number of items on the last submitted VAT Return, but they can quickly escalatel into an in-depth review of the organisation’s activities over the previous four years. Such investigations can last in excess of 12 months and result in substantial liabilities for VAT, late payment interest and penalties as well as significant amounts of professional fees. We recommend to all businesses, including those within the charity sector that they undertake a professional review of their VAT affairs every three to five years. This ensures that they are not only complying with their VAT obligations, but also that they are making use of any available tax reliefs and are maximising their opportunity for recovery of VAT on expenses. By having regular reviews, it means that should HMRC open an enquiry, there are no surprises and matters should be brought to a close efficiently. The Tax Advisory team at Scrutton Bland have significant experience advising businesses in the charity and not-for-profit sector on VAT matters, as well as dealing with HMRC enquiries. If you have any concerns at all regarding your organisation’s VAT affairs or are interested in having a VAT review carried out, please contact us at hello@scruttonbland.co.uk or phone us at 0330 058 6559.
determine if VAT should be charged on the supply of charitable services. If the supply should not have VAT applied, it could be because the supply is zero-rated, exempt or non-business income and therefore outside the scope of VAT. All three have the same VAT applied, zero, but each one has a different impact on the recovery of input VAT. Take for example grant income. Where this is freely given, and the funder receives no direct benefit from the activities which are funded by the grant, this will usually fall outside the scope of VAT. However, where there is a clear and direct link between the services being carried out by the organisation and the consideration received, this can fall within VAT. In some cases, although this income is within the scope of VAT, a specific exemption may be applicable meaning that VAT should not be charged. Where a charity undertakes activities with a view to realising a profit to help fund its primary work this will ordinarily fall within the scope of the VAT legislation. It follows that if organisations have (possibly as a result of the pandemic) developed new services to help fill a funding gap, it is likely that these activities will also be viewed as having a profit motive and could have VAT implications.
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