Tag Archives: vat-structure

Added VAT Cost For Charities

By   7 April 2014
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Charities have a very hard time of it in terms of VAT, since not only do they have to contend with complex legislation and accounting (which other businesses, no matter how large or complicated do not) but VAT represents a real and significant cost.

By their very nature, charities carry out “non-business” activities which means that VAT is not recoverable on the expenses of carrying out these activities.  Additionally, many charities are involved in exempt supplies which also means a restriction on the ability to recover VAT on attributable costs.

These two elements are distinct and require separate calculations which are often very convoluted.  The result of this is that charities bear an unfair burden of VAT, especially so since the sector carries out important work in respect of; health and welfare, poverty, education and housing etc.  Although there are some specific reliefs available to charities, these are very limited and do not, by any means, compensate for the overall VAT cost charities bear.

Another issue is legal uncertainty over what constitutes “business income” for charities, especially the VAT status of grants.  It’s worth bearing in mind here the helpful comment in the EC case of Tolsma translated as: “…the question is whether services carried on by [a person] were carried on for the payment or simply with the payment”.

Many charities depend on donations which, due to the economic climate have fallen in value at a time when there is a greater demand on charities from struggling individuals and organisations.

What can be done?

  • Ensure any applicable reliefs are taken advantage of.
  • If significant expenditure is planned, ensure that professional advice is sought to mitigate any tax loss.
  • Review the VAT position to ensure that the most appropriate partial exemption methods and non-business apportionment is in place.
  • Review any land and property transactions. These are high value and some reliefs are available. Additionally it is possible to carry out planning to improve the VAT position of a property owning charity.
  • Review VAT procedures to ensure that VAT is declared correctly. Penalties for even innocent errors have increased recently and are incredibly swingeing.
  • Consider a VAT “healthcheck” which often identifies problems and planning opportunities.

We have considerable expertise in the not for profit sector and would be pleased to discuss any areas of concern, or advise on ways of reducing the impact of VAT on a charity.

Please click here for more information on our Charity Services

VAT – Changes to the treatment of electronically-supplied services from 2015

By   24 March 2014
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Although it seems some time away, these changes, which come into effect on 1 January 2015, will have a significant impact on any business which provides e-services (wherever in the EC it is based). It is important for suppliers to understand and plan for the new rules; the sooner the better.

What are e-services for VAT purposes? – Broadly these are services usually obtained via the internet and may comprise; films, music, information, software for which the supplier makes a charge.

Are all of these services affected? – No, only B2C services (where the recipients are not in business, eg; an individual). The rules for B2B supplies will not change.

What are the changes? At present, suppliers based in the EC charge VAT at the rate applicable in the EC Member State in which the business is located. Currently, therefore, VAT planning insists that technology companies locate in countries with low VAT rates. However, to combat this, the EC will introduce a rule whereby the place of supply (where VAT is due) changes to where the customer is located (not where the supplier belongs). Consequently, a company currently based in Luxembourg supplying a service which is downloaded by an individual in the UK will charge VAT at 15% (the rate in Luxembourg). From 1 January 2015, the UK recipient will pay VAT at 20% (the UK rate).

Businesses will need to introduce these changes and manage budgets and forecasts to recognise what, on the whole, will be a significant increase in VAT payable. This will, for most businesses result in a reduction in profits or an increase in prices for customers.

As may be seen, this will add considerable complexity for businesses to deal with and with the current penalty regime care must be taken to avoid even further costs. Businesses affected must start to plan for these changes as soon as possible.

Are there any easements available? The new rules change would require EC suppliers to register and account for VAT in every EC Member State where their services are downloaded by non-business customers. In order to avoid this burden a “mini one stop shop” (MOSS) is also being introduced. This will allow suppliers to register just once in their own EU Member State. This single registration will then allow them to account for VAT due in other Member states. HMRC has indicated that businesses will be able to register under the MOSS from October 2014. How this will actually work in practice remains to be seen.

Good luck everybody!

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