The pandemic has seen charities having to deal with significant financial pressures during 2020 and 2021. Not being able to open charity shops or organise events and face-to-face activities has meant that their income has been drastically reduced.
Furthermore, many of the activities that have not taken place constitute taxable supplies made in the course of business for VAT purposes, so this is an additional financial impact on charities. This is having a negative impact on their ability to recover the VAT incurred on expenditure because taxable supplies made in the course of business give the right to recover VAT; exempt supplies and/or non-business activities do not.
One way of mitigating the impact of the Coronavirus pandemic on VAT is to restructure arrangements in a way that changes them so that they become taxable activities for VAT purposes. This restructuring could be done in a way where there would be no net costs to anyone; it would simply be an exercise in good housekeeping.
For example, a charity could receive donations and similar contributions from corporate supporters. Because this income is a gift, it falls outside the scope of VAT, i.e., non-business. However, the corporate sponsor may be carrying out business activities that allows it to fully recover the VAT incurred on expenditure.
It is a good idea to explore whether the arrangements with the corporate donor could be amended so that the charity (potentially via its trading subsidiary company) is providing sponsorship services in return for the funding. This would be the case if the charity were to agree to display the corporate donor’s logo on its materials and website in return for an agreed level of funding (consideration).
This would be a taxable supply for VAT purposes and subject to standard-rate VAT. However, if the corporate funder were located outside the UK, it would be outside the scope of the UK but with the ability to recover VAT on the related costs. Additionally, the arrangements could be reversed in that the corporate supporter pays the charity in return for it to be able to display the charity’s name on its website and materials, and to state that the parties are “working together in partnership”.
On another matter, regarding VAT recovery and partial exemption methods, HMRC has accepted that charities as well as other organisations may be experiencing reduced VAT recoveries due to the restriction of the activities that can be undertaken during a pandemic. In March 2021, HMRC issued a Revenue and Customs Brief outlining the opportunities and process for applying for a temporary alteration in their business/non-business and partial-exemption recovery method(s).
The proposed temporary method can be based on retrospective levels of taxable supplies and typical levels of VAT recovery. HMRC expects the proposals to be evidenced and the result to provide for a fair and reasonable VAT recovery. HMRC has said that the proposed changes would be part of an “accelerated process” and that its responses would be ‘quick’.
Overall, in a world where taxation is self-assessed, identifying maximum efficiencies and optimum structures to achieve VAT savings is best done at an early stage. Taxpayers are entitled to structure their affairs in the most VAT-efficient ways in order to only the pay the VAT they are legally required to. Good housekeeping is necessary to ensure the best overall financial outcome.