Charity VAT & Tax workshop 16 January 2018 Luke Savvas Jon Daley Thomas Mobee
Topics Overview of VAT - liability of income streams Business and non-business treatment - implications for VAT recovery VAT implications of raising funds through grants and commercial agreements VAT implications when: INGO leads with a private sector consultancy acting as the delivery partner (sub) A private sector consultancy leads with INGO acting as the delivery partner (sub) INGO s bids include sub-grants to UK based Agencies who deliver services overseas
Charity VAT & Tax workshop VAT is a tax on supplies made in the course of furtherance of any business. Supply includes all forms of transactions, but not anything done otherwise than for a consideration Donations Grants Investments, dividends, legacies Consideration for supply of Goods Consideration for supply of Services Non-business Business
VAT Liability of income Income / Activity Business Non-business Taxable Exempt
Grants v Contracts - Indicators Is there a written Service agreement? Is the income consideration for a supply (i.e. payment in respect of carrying out an undertaking)? Does the Funder receive anything in return? If not the grantor, does a 3rd party receive a benefit in return? Is the charity under specific obligations to the grantor? Are there conditions attached to the provision of the funding? Do these go beyond normal good housekeeping?
Grants v Contracts - Indicators Who owns the intellectual property rights created as a consequence of this agreement? Does the funder influence how the charity performs its activities as a consequence of the funding? Damages for breach Reciprocal obligation Mutual pact to carry out an obligation Termination rights
VAT & Commercial Agreements Goods treated as supplied where they are located when title passes Services (Consultancy contract) when supplied B2B, POSOS regulations treat these as supplied where recipients are established. Recipients within the UK taxable at the S/R Recipients in other EU countries - subject to the reverse charge Recipients outside the EU - outside the scope of UK VAT
VAT & Commercial Agreements Consultancy contract with DFID - UK VAT due; However, where DFID issues the contract and pays for the supply; but Service delivery is made to overseas based NGOs or governments; By concession, treated as O/S supply DFID has a special agreement with HMRC which allows it to receive such supplies as if they were made to an entity established /located outside the UK.
DFID Contracts Core expenditure INGO Invoices Services DFID Overseas recipient (non-eu)
VAT & Commercial Agreements INGOs would be allowed to recover the VAT incurred in relation those supplies; and O/S income deemed to be taxable in relation to their partial exemption methodology (increasing their overhead recovery rate)
INGO subcontracts service delivery INGO sub-contracts some of its service delivery - Normal VAT rules would apply to the 3 rd party organisation s supply to INGO: If established within the UK, VAT charged to INGO at the standard rate. INGO should be able to recover that VAT amount, subject to its treatment of the main supply If established outside the UK, the supply would be subject to reverse charge. INGO would charge itself VAT on the supply and subject to its treatment of the main supply, recover the VAT incurred in full
INGO subcontracting service delivery INGO Services & Invoices Other UK Suppliers/ Agencies Invoices Services DFID Overseas recipient (non-eu)
INGO lead contractor on DFID contract Alternatively, INGO could enter into collaboration with UK based Agencies to provide the services If able to provide evidence that it is in a collaborative arrangement with the other Agencies the supply between them would be disregarded for VAT Typical evidence include any original funding bid documentation showing details of the collaborative partners Alternative evidence might also be acceptable
INGO lead contractor on DFID contracts INGO Services & Invoices Other UK Suppliers/ Agencies Invoices Services DFID Overseas recipient (non-eu)
Summary VAT is a major cost - liability of income Implications of Business /non-business income treatment for VAT recovery Opportunities for managing VAT exposure risks in commercial agreements Questions, Questions, Questions!!
Payments to overseas bodies HMRC guidance states: A charitable payment made to a body outside the UK will only be charitable expenditure for UK tax purposes by the charity provided the charity can clearly demonstrate to the Commissioners for HMRC that it has taken steps that the Commissioners consider are reasonable in the circumstances to ensure that the payment is applied for charitable purposes. If that condition isn t met, the payment is treated as non-charitable expenditure by the charity for UK tax purposes. Non-charitable expenditure will restrict charitable exemptions from tax on income
Payments to overseas bodies Payment to an overseas body: includes any monetary payment to charities, companies, agents, partners and individual persons outside the UK Trustees are required to carry out appropriate research followed by monitoring and evaluation, and to avoid or minimise risk to the charity s finances The trustees must be able to describe the steps they take, explain how those steps ensure charitable application of funds, demonstrate that those steps were reasonable and produce evidence that the steps were taken It s not sufficient for the charity to simply establish that the overseas body is a charity under the domestic law of the host country. Nor is it enough to keep records of how things are spent
Payments to overseas bodies When reviewing overseas payments HMRC will generally ask for information/documentation about the: Person or persons to whom the payment was given Specific charitable purpose for which the payment was given Assurances from the overseas body that the payment will be applied for the purpose for which it was given Detailed financial records providing robust audit trails Steps the trustees took to ensure the payment will be applied for charitable purposes Follow-up action taken by the trustees to confirm that payments were applied properly
Overseas secondments Points for consideration Planning Budgeting Registrations with Authorities Apply Tax/NI Reliefs/Certificates Payroll De-register with Authorities Finalise Outstanding Returns/Payments
Gift Aid benefit rules A donor gives 50 to a charity. The charity gives him a book which retails for 10. Can the charity claim Gift Aid on the donation? Yes. 10/ 50 = 20% < 25% of donation New rules from April 2019 -> 5% on everything above 100
Gift Aid donor education HMRC have been working with online platform providers for Gift Aid Recommended three statements by donor: I am donating my own money and the funds have not come from anyone else including family members or from an office or bucket collection The money I am donating is not the proceeds from sales of goods or services or the sale of tickets I have not received something in return for this donation such as an entry ticket to an event or a raffle ticket
Gifts of shares, land and property Market value / sale value of gift of shares Capital Gains Tax on disposal (annual exemption used) Tax saving to donor (higher rate taxpayer) Gift of shares route 5,000 5,000 Gift Aid route (shares sold and cash gifted) nil (exempt) 5,000 x 20% = 1,000 5,000 x 40% = 2,000 5,000 x 25% = 1,250 Gift Aid claimed by charity nil 5,000 x 25% = 1,250 Gross donation to charity 5,000 5,000 + 1,250 = 6,250 Net cost to donor 5,000-2,000 = 3,000 5,000 + 1,000-1,250 = 4,750
Case Study - Spring Dinner Dance A dinner dance is being organised for Spring 2018 The evening draws to a close a broad fundraising campaign undertaken in the previous weeks You are asked to consider the gift aid opportunities (and risk) of the evening and the events leading up to it Following are some of the situations arising
Case Study - Spring Dinner Dance 1. Volunteers have been found to help set up for the evening. As is the charity s practice, volunteers can reclaim travelling expenses and costs for lunch. Are there any opportunities here? Are there any practical matters to take account of in how an opportunity may work
Case Study - Spring Dinner Dance 1. 2. 2. A wealthy donor and long time supporter of the charity unfortunately cannot make the evening but is grateful for the invite and donates 100,000 to the charity. If the donor has UK taxable income of over 150,000 per year what is the cost to her of the donation?
Case Study - Spring Dinner Dance 1. 2. 2. A 3. The charity wants to thank the donor for the donation by taking her out for a meal. If the meal cost 1,500 (her husband came too and the meal went on a bit later than expected), is there an issue regarding the initial 100,000 gift aided donation?
1. 2. Case Study - Spring Dinner Dance 2. A 3. The 4. During the meal, the same wealthy donor mentioned being interested in making a legacy to the charity. Is there anything that may be worth mentioning to the donor, that may be beneficial to her estate, in respect of a legacy to charity?
Case Study - Spring Dinner Dance 5. At the dinner there is an auction. A well known designer shoe maker decides to gift a pair of shoes from his retail collection for the auction. The shoes retail for 500 a pair (their manufacturing cost is 10) but in the excitement of the evening the shoes auction for 2,000. Are there any gift aid structuring opportunities here? If the retail price was actually 99 (they still auctioned for 2,000) could the winning auction bid be gift aided? If the designer had personally signed the shoes would you answers to (a) and (b) change?
Case Study - Spring Dinner Dance 6. A donation bucket is sat on the bar at the dinner and cash donations of 695 are received in the evening. No gift aid form was left by the bucket. Can anything be claimed from HMRC on these donations?
Charity VAT & Tax workshop Luke Savvas Partner Jon Daley Senior Manager Thomas Mobee Senior Manager 020 7556 1460 savvasl@buzzacott.co.uk 020 7556 1292 daleyj@buzzacott.co.uk 020 7556 1320 mobeet@buzzacott.co.uk