The tax system is more complicated than ever with the unfortunate consequence that many organisations that have little manpower and cash resource to deal with administrative complexity are having to spend time and money to ensure that they stay on the right side of HM Revenue & Customs.
Here are our top tips on the tax issues charities should constantly be considering:
VAT
VAT comes top of the list as it is the tax that people most often overlook, particularly in the charity sector where the income which a charity generates may not be subject to income/corporate tax.
Whether or not an activity is charitable or not is irrelevant for VAT. The key concept is whether or not a supply of goods or services has been made in the "course or furtherance of a business". Even though a charity operates on a non-profit making basis, supplies made by that charity can still be made in the course or further of a business and therefore liable to VAT.
Two key areas of difficulty for charities are grant funding and sponsorship.
In relation to grant funding, it is often not clear whether the income being provided is a genuine grant, which is freely giving with nothing being received in return by the grant provider, or is in fact a payment for a service provided to the grant provider. A genuine grant is not subject to VAT. A payment for services, is vatable at the appropriate rate.
Equally, where a charity receives sponsorship from a business organisation, or is provided with lottery funding, the question of what the charity is being asked to provide in return for that sponsorship or funding must always be considered. If the charity is allowing use of its logo, or agreeing to promote the funding provider in some way, the charity is probably providing a service to the funder and it is likely that VAT should be charged.
HM Revenue & Customs recognises that the VAT treatment of grants and sponsorships is not clear cut and is in the process of updating its guidance on the VAT treatment of such payments. It is anticipated that this guidance will be available in the autumn.
Taxable Trading
There is a common misconception that charities are exempt from tax. The trading income of a charity is only exempt from tax if the trading is carried out in fulfilment of the primary purpose of the charity, is ancillary to the primary purposes of the charity, if the trading is mainly carried out by beneficiaries, or if the trade is a VAT exempt fundraising event. In addition, to be exempt from tax, the profits must be applied for charitable purposes.
If a charity carries on a trade which is not in fulfilment of its charitable purposes, then any income generated by that trade will be subject to tax, even if that income is applied for a charitable purpose.
For example, if a charity operates a café which is freely accessible to the general public, then the charity would be subject to tax on the income generated by the café. This makes sense, as it would be unfair if it was possible to obtain a competitive advantage by becoming a charity. If, however, the café was only open to those who were using the charity's facilities e.g. a museum which operates a restricted access café, then the profits arising from the café would be exempt from income tax if applied by the charity for charitable purposes.
If a charity is carrying on a non-charitable trade, then the charity should consider establishing a wholly owned subsidiary company to carry out any taxable trading activity. Adopting such a structure would ring fence risk relating to the trade and ensure that the profits generated by the trade can be received by the charity in a tax efficient manner.
Gift Aid
HM Revenue & Customs has recently been focussing on the validity of gift aid relief claimed by charities, particularly when donations are made using on-line providers, and HMRC now believes that up to £1m of gift aid is currently being paid out when none is in fact due.
As a consequence of the review, HMRC is working with the on-line providers to attempt to improve the checks which are carried out, and also to attempt to educate donors. HMRC is also considering making changes to the gift aid confirmation which a donor is required to give to a charity.
During its review, HMRC found that the common errors made by charities in relation to gift aid claims were:
- where a fundraiser collected donations from a variety of different sources and then claims gift aid relief on the full amount collected;
- Money raised through sales of tickets and raffles is donated by one individual;
- Where the donor received something in return for the donation and the receipt was not within the allowable limits.
In order to ensure that any gift aid claims are valid, charities may wish drawing donors' attention to the fact that a gift aid claim cannot be made in the above circumstances.
Disclaimer
The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.
