Never a day goes by without the impact of January’s rise in VAT hitting the headlines with the charity sector being one of the hardest hit. Karen Mulcahy, our VAT and charities expert, takes a look at the key factors for this.
There are several reasons why charities feel the rise the most:
- most charities are either regarded as not being in business, or they make supplies which are exempt from VAT – both of which prevent or restrict the ability for the charity to recover VAT incurred on its costs.
- many charities provide services similar to those supplies by Local Authorities or NHS Trusts. These authorities and trusts are able to recover VAT they incur on costs under specific legal provisions, but there is no similar provision for charities.
- many charities are too small to warrant employing or investing in their own staff. This means that charities incur external costs, such as payroll, bookkeeping etc, which incur additional charges plus VAT (where applicable).
Whilst there are benefits to a a charities exemption from VAT - they are not required to charge VAT on relevant supplies so any income they receive is not consumed in further taxation, this does not relieve the pain of not being able to recover VAT charges incurred on costs – putting them at a disadvantage when compared to Local Authorities and NHS Trusts.
Equally charities do not benefit from a general exemption, and, contrary to some beliefs, are required to be charged VAT on its costs. In this way supplies by charities which are similar to, or in competition with, business are likely to be subject to VAT, such as trading in Christmas cards. Yet other certain supplies, for example music events, dinner/dances etc, will be exempt from VAT when provided by a charity, which would always be subject to VAT when made by a VAT registered business – e.g. music event, dinner dance etc.
This is one area of VAT where it really is a case of the devil being in the detail. My basic advice to weather the VAT storm is to make sure all available reliefs are being used and review the use of costs to optimise VAT recovery.
For some areas of this sector the coming months do look brighter: The Mountain Rescue Service have just been told that they will be receiving a grant which is aimed at covering the cost of irrecoverable VAT; There are moves afoot to properly implement an exemption for shared services, which is contained in EU law but has not yet been properly implemented in the UK, and there has been a lot of support behind calls to provide charities with the ability to recover VAT on costs – this is particularly interesting as many charities have been established to ‘plug the gap’ where public bodies and / or funding have not met the perceived public need, such as care and welfare charities. We’ll have to watch this space!
If you would like further advice on this issue or any other VAT matter, Karen can be contacted on 01962 735350 or be email: email@example.com. You can stay ahead with VAT by signing up to our free eshot and newsletter service: Click here to sign up.