VAT is quite possibly the most complex and expensive tax that most charities have to deal with. There are many potentially problematic areas. The following are my top ten examples of common bear traps...
1. Wrongly attributing an income stream as grant funding when it is in fact a fee for the provision of services.
My usual approach is to ask who benefits from the work being done? If there is a clear benefit to the payer then the payment is likely to be a fee for the provision of services to the payer, but if the true beneficiaries are the recipient of the funding or the wider public then the payment can usually be seen as a grant free of VAT.
2. Corporate donors rarely make a donation to a charity.
They usually require something in return such as recognition they are the donor using their corporate logo, or perhaps use of the charity’s logo, or website links between the charity and the corporate, or maybe volunteering opportunities for their staff. These make the payment liable to VAT. This may not be a problem for the supporter, but if VAT is an issue to them consider separate payments of sponsorship subject to VAT and VAT free donations.
3. Remember that VAT is due on supplies of services between the charity and its trading subsidiary, unless the two are in a VAT group.
An otherwise partial solution is for staff to be jointly employed by each entity. Recharges between the two for staff costs are then ignored for VAT.
4. Fundraising is only exempt from VAT provided it falls within the fundraising VAT exemption.
There are specific limits in the rules governing the number and type of events that can be held (no more than 15 events of the same type in the same location per year). NB any goods sold after the event will be subject to VAT.
5. Education is not always VAT exempt.
In order for the exemption to apply any profits made from the VAT exempt education can only be used to help further or improve future supplies of VAT exempt education. Profits can be used to discount the cost of later courses
6. The VAT exemption for certain medical services and education services only applies where the services themselves are delivered.
Supplies of agency staff are subject to VAT because the agency is providing people and not VAT exempt services.
7. VAT can only be recovered on costs to the extent the charity makes VAT taxable supplies.
Many suppliers to the sector assume that VAT can be recovered in full just because the charity is registered for VAT. But VAT cannot generally be recovered on grant and donation funded activities, and cannot be recovered on VAT exempt activities (subject to the VAT partial exemption de minimus) and can only be partly recovered on central costs and mixed activities.
8. The VAT zero rate on charity advertising costs only applies on advertising in general media.
Individual specific advertising is subject to VAT. This includes Facebook advertising, which is a source of much controversy in the sector.
9. When signing a contract watch out for what it says on VAT.
If it does not specifically say the price is inclusive of VAT you can expect to be charged VAT on top unless the service falls within a VAT exemption.
10. Don’t forget the VAT reverse charge.
If you are VAT registered and undertake fee charging activity you may need to charge yourself VAT on the value of services received from abroad, and can then recover that VAT or not depending on how the services are used. Even if you are not VAT registered but have fee income if the value of services bought in exceeds the compulsory VAT registration threshold then you will have to register for and charge yourself VAT under the reverse charge. This is supposedly to create a VAT level playing field between UK and overseas suppliers of services. Few charities get this right.