Charities – funding and VAT liability
10th September 2012 by Stewart Henry
The recently released Tax Tribunal decision in the case of Hope in the Community Ltd (HITC) highlights potential VAT problems arising from supplies of services by charities to Government departments and agencies, local authorities and similar bodies. A number of these organisations are increasingly outsourcing the provision of services to charities and non-profit-making and voluntary groups.
HITC argued that the funding payments it received were outside the scope of VAT rather than payments for services provided, and subject to VAT. The Tribunal observed that “the Appellant’s modus operandi appears to have been to undertake outsourced activities on behalf of the funder organisations rather than carrying out its own charitable aims and objectives with the assistance of independent unconditional gratuitous payments. The fact that the general nature of the projects may have complimented the Appellant’s declared charitable objective is not relevant in determining whether there has been a supply in consideration of the payments made”.
The Tribunal disallowed the charity’s appeal and in its decision commented that “the payments were not made casually, without commitment or as acts of benevolence but as part of specific schemes whereby the funder and the Appellant collectively intended to carry out specified aims and objectives, albeit charitable in nature. The payments were made either as a condition of, or in expectation of, services rendered by the Appellant”. This being so, the sums received by the charity from funders were subject to VAT at the standard-rate.
When charities consider the VAT liability of funding received the key areas of risk are:
• deciding whether payments, such as grants, are payment for services supplied, in which case VAT may be due;
• deciding whether any payments for services are VAT exempt;
• determining whether the organisation has a right to reclaim VAT incurred on expenditure; and
• whether income received triggers a requirement to VAT register.
It is important that charities determine the correct VAT liabilities of income received because, in addition to VAT sums owing, HMRC can impose penalty and interest charges.
For further information or advice please contact Stewart Henry.
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