Charity Management

In no particular order, I have listed the main areas of change on the basis that every reader will at least be affected one of them.

 

This was a case where HMRC appealed the original Court of Appeal decision in favour of the taxpayer. The House of Lords agreed with the Court of Appeal and found in favour of the taxpayer. The case is now a window of opportunity for the taxpayer which will close on 31 March 2009. After this date the present rules on not being able to claim back VAT more than 3 years old will be the only ones that will apply.

However at the moment, taxpayers have the opportunity to recover any output tax overpaid to HM Revenue & Customs (HMRC) between the years 1973 and 1996, while it can recover any input tax that it did not claim between 1973 and 1997.

Before vharities and alike dismiss this out of hand as being so long ago, HMRC has accepted that taxpayers are unlikely to have any records and therefore they will accept best judgement on any claims that may be submitted.

It is an opportunity to recover any VAT that could have been ‘lost’ by the organisation in the previous years. In addition, although the VAT may not be considered substantial when analysed annually, one would expect the interest payable by HMRC on the amount claimable would see any claim double if not triple in some case.

Areas where claims have already been submitted include:

·  VAT that has never been recovered on residual costs.

·  VAT that has just never been recovered i.e. staff entertainment, motor expenses, substance.

·  VAT not recovered on fundraising costs.

·  VAT not recovered on investment management fees.

·  VAT overpaid on membership subscriptions.

The opportunities are endless, yet limited; by next April it will be too late to capitalise on them.

 

It is now more and more common for friends of a charity to be sponsored to cycle around the Great Wall of China or climb Ben Nevis as it is to hold a coffee morning or a jumble sale.

Since these ‘participatory’ events became the norm, HMRC has struggled to determine who should be paying VAT and when. Was it the charity’s obligation or was it the holiday company who organised it and on what amount was VAT due? HMRC is due to issue a new set of guidelines on this in the future and a ‘draft’ has already been issued in advance for comment upon by those affected. At present this ‘draft’ is not in free circulation although a copy can be obtained from the Horwath Clark Whitehill website.

The main points to bear in mind is that the charity will only have a duty to VAT as a supply under the Tour Operators Margin Scheme when there is two nights or more of accommodation offered and the charity holds itself out as the principal in organising the event.

If both of these conditions are fulfilled, then the charity will have a zero-rated margin on non EC events and a standard-rated margin on events held within the EC. The charity will be required to account for VAT on the contractually stated amount that the participant must pay in order to take part in the event. Any money that is collected by the participant which exceeds that required amount can be treated as a donation and is therefore outside the scope of VAT.

The margin is then the minimum amount required to be paid which is put against the costs that the charity has incurred in the organising of the event i.e. the flights/accommodation. VAT is then payable, either zero or standard on the margin, depending on where the event takes place.

If the event involves less than two nights of accommodation then the minimum payment required from the participant in order to take part is exempt from VAT.

 

HMRC has issued a consultation paper via Revenue Brief 30/08[i] on the above topics, which anyone affected by these headings should download from the HMRC website. The paper looks at ways to simplify partial exemption and the capital goods scheme in the future.

There are four main areas which are covered by the paper are:

1)      The Partial Exemption Standard Method (based upon income).Proposals for change include the use of a provisional recovery rate based on the previous year’s calculation, changes to when the year-end calculation is completed and the introduction of alternative standard methods.

2)      The De Minimis Limits. Introduction of a simpler test, possibly based on an annual test and the raising of the current threshold of £7,500.

3)      Combining Methods. The possibility of combining the business/non-business and partial-exemption calculations to give anyone affected a ‘combined’ single method of calculation.

4)      Capital Goods Scheme. The possibility of increasing the threshold (presently at £250,000), thus reducing the number of capital good scheme calculations and simplifying the definitions as to when the scheme applies.

HMRC has asked for any comments to be submitted before the end of September. If these areas affect your organisation you should be looking to respond to HMRC as your comments could affect the shaping of the new rules and regulations expected in 2010.

 

At the time of writing, any person who makes a net VAT error of less than £2,000 can automatically disclose this on their next VAT return without further action. Such disclosure protects against potential penalties being issued by HMRC.

With effect from 1 July 2008 this limit has been raised to the greater of £10,000 or 1 per cent of turnover, subject to an upper limit of £50,000.

These new limits of disclosure should be read in conjunction with the new penalty regime which will be introduced as early as 1 January 2009 (see Penalties below).  It will be interesting to see if, having made such disclosures, clients will now end up with a penalty if they cannot prove they acted with reasonable care.

 

A new penalty regime is to be introduced next year which will affect March 2009 VAT returns either monthly or quarterly onward – i.e. it will in some cases be effective from 1 January 2009.

In trying to simply align penalties across the different taxes which HMRC has responsibility for, it has introduced new terminology, new penalties and new mitigation procedures (see figure 1).

 

 

HMRC has sought to reassure taxpayers that no penalty will be due if the inaccuracy was made despite the person taking reasonable care.   It is strongly recommended that measures should now be put in place now to minimise errors as it may prove more difficult in the future to prove that reasonable care was exercised, when completing VAT returns.

 

HMRC has always had a Memorandum of Understanding with the catering industry that allows catering contracts to be treated as both a supply of goods as a principal and the supply of services as an agent. This enables catering contractors to charge VAT only on the management fees payable under the contract, the supply of food being zero rated and staff wages being treated as outside the scope of VAT by concession.

There is no such Memorandum of Understanding in respect of cleaning contracts. However, some contract cleaners have supplied cleaning services to non-profit-making bodies by using staff that are employed under a dual (or joint) contract of employment. For VAT purposes there is no supply of staff between two parties that jointly employ an individual. The wages of the staff concerned have therefore been treated as outside the scope of VAT and only the management fee payable under the contract has been treated as subject to VAT.

However, there is at least one instance where this arrangement has been put in place by a large firm of contractors and been subject to an inquiry by HMRC. It has ruled that the joint contract has been put in place solely to avoid VAT and therefore constitutes an abuse of rights under the principles established in the European Court of Justice, case of Halifax plc, where the Halifax had ‘abused rights to reclaim VAT by entering into transactions for the sole purpose of VAT avoidance’[ii] As a result the contractor concerned has informed all its clients that the whole of the contract charge, including staff costs, will be subject to VAT from a current date. This will obviously represent a significant cost to organisations that are not able to recover all VAT incurred..

Organisations who have presently entered into such arrangements as described above may well find their contractors being the subject to enquiries from HMRC.

 

An interesting tribunal case in Scotland has held that Jeanfields Swifts Football Club was a charity and the construction of a football pavilion qualified as a village hall or similar and they could therefore get zero rating on construction costs (Case 20689). The club was held to be run for purposes beneficial to the community in line with the new approach to defining charities being organisations which provide public benefit (see page 22 of this issue). Its activities were seen as more than just providing opportunity for footballers but extended to other activities throughout the community as a whole.   The pavilion was accepted as a useful and worthy facility designed not for trading but for the benefit of the local community in a deprived area of Perth where it was virtually the only community facility around. It therefore qualified as a village hall or similar.

Charities that may believe that they have had zero rating denied in similar circumstances may wish to revisit their ruling to see why they were denied.

Reconstructing a building
A recent Tribunal ruling (Whitechapel Art Gallery v Commissioners for HMRC) will give charities an opportunity to improve their cashflow on the reconstruction of buildings which they use for business and non-business purposes.

Up to this ruling, the Lennartz principle[iii] allowed a taxpayer to claim all the VAT incurred on a new building which will be used for non-business activity such as free entry to an art gallery and taxable activity such as running a shop or restaurant to be recovered up front. VAT is then repaid to HMRC by the charity in each of the next 10 years to reflect the non-business use in each year. This gives a cashflow advantage to the charity which may be significant in view of the amount of VAT involved.

The art gallery carried out work on its Victorian building, which it was unable to demolish as it was in a conservation area. Instead it carried out a major reconstruction of the building which was short of an entirely new building. The tribunal held that there was no case law which stopped the Lennartz principle from applying to such a reconstruction and effectively widened the number of works which qualified.

Charities that have carried out major restructuring of their property in the last three years should revisit the VAT treatment and see whether there is any opportunity to improve their cash flow by claiming VAT incurred.

This is just a taster of some of the interesting points that have taken place over the last nine months. For a tax that is over 35 years old, it never ceases to amaze me as to the different opinions, rulings and decisions that seem to result in significant changes to the tax for future years.

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