Following on from our previous article on VAT Risks for Charities, Lyn Canning Hagan, Director and Eddie Broomfield, VAT Manager in GMcG’s Charity Team highlight some of the VAT opportunities where charities and in certain circumstances, not for profit organisations, can obtain VAT relief on expenditure or income, whether VAT registered or not.
Early planning for VAT is crucial, in particular, when a charity is considering one of the largest purchases it can make, a property. We highlight the VAT reliefs available on the rental of property; purchase of property; and some of the more common VAT reliefs available to charities.
Charities may also consider making claims for overpaid VAT, where possible, if they have not obtained a particular VAT relief to which they were entitled.
Relief from VAT on Rent
Where a charity pays rent in relation to a property, the charity is not required to pay VAT in addition to the rent where it uses the property for at least 95% ‘relevant charitable purposes’ (non-business purposes). The meaning of non-business purposes was discussed in our previous VAT update, VAT Risks for Charities, which can be viewed here.
The relief offers a VAT saving for a charity which is not entitled to recover VAT charged to it on rent i.e. where it is not entitled to be VAT registered or where its input VAT recovery is restricted.
Relief from VAT must be claimed by the charity, however, the charity needs to ensure that it qualifies for the relief both in terms of whether its activities are non-business for VAT purposes,and whether it satisfies the 95% test (various methods can be adopted to measure use of the property).
It should be noted that where the charity uses the property, or part thereof, for general administration purposes, it will still be required to pay VAT on rent in relation to this property, or part thereof.
Purchase of a Property
Before considering the VAT reliefs available to a charity on the purchase of commercial property, we highlight the scenarios in which the sale of a property to a charity would, in the first instance, be subject to VAT.
The most common scenarios in which the sale of property to a charity could be subject to VAT are:
At the earliest stage of considering the purchase of a property, it is imperative that a charity establishes whether the property falls into either of these two categories in order that it may review to what extent it can mitigate the potential VAT cost.
The extent to which a charity can mitigate such VAT shall be dependant upon the charity’s intended use of the property as follows.
1. Business Use
Where a charity intends to use the property for at least 95% ‘relevant charitable purposes’ (non-business use), VAT at the standard rate of 20% otherwise chargeable on the sale of the property to the charity can be mitigated in full giving rise to significant savings.
The specific mechanics of how VAT relief is obtained by a charity is dependant upon which of the two scenarios above applies to the property. But as with relief from VAT on rent, the charity must consider whether it qualifies for relief both in terms of whether its activities are non-business for VAT purposes,and whether it satisfies the 95% test (various methods can be adopted to measure use).
2. Mixed Business and non-business use
Where a charity intends to use the property for a mix of non-business use and business use and it does not qualify for VAT relief above, a charity can consider to what extent it is entitled to recover input VAT incurred on the purchase of the property.
Recovery of input VAT is dependent on the extent to which the charity uses the property to make taxable business supplies for VAT purposes and on being registered for VAT.
In order to maximise input VAT recovery, it is possible to negotiate with HMRC a ‘special method’ of input VAT recovery to agree a specific methodology to be applied when calculating the amount input VAT recoverable by a charity.
When a charity is considering purchasing a property it is crucial that planning for VAT is undertaken at the earliest opportunity to maximise any potential relief from VAT.
The supply of advertising on someone else’s time or space to a charity is zero-rated for VAT purposes. The relief applies to an advertisement placed by the charity on any subject matter. Additionally, supplies closely connected to the advertisement also qualify for the relief including advertisement design and production.
Supply of Staff
The supply of staff is normally subject to VAT at the standard rate of 20%. Where a charity receives a supply of staff and can not recover VAT or its input VAT recovery is restricted, the VAT charged on the supply of staff is an additional cost.
However, where staff are jointly employed by the two organisations involved, there shall be no supply for VAT purposes and no VAT payable on the charge made for the supply of staff. This VAT relief will likely require contracts of employment to be amended.
Additionally, and specific to charities and not for profit organisations, if staff are supplied from one charity or not for profit organisation to another; those staff work only work in the non-business activities of both organisations; and the charge for staff does not exceed their normal remuneration, there shall be no VAT chargeable on the supply of staff.
Fuel and Power
VAT relief is available on the supply of fuel and power including electricity and gas. Where this relief applies VAT charged on the supply of electricity or gas is reduced from 20% to 5%.
Similar to VAT relief on the rent/purchase of property, this VAT relief is available where the property is used for non-business purposes. However, the threshold at which the relief is available is much lower at 60% non-business use of the property rather than 95% for property rent/purchase. The supply of small quantities of fuel and power may also qualify for the relief.
Where a charity or not for profit organisation holds a fund raising event, income generated from the event could potentially benefit from two VAT reliefs, either zero-rating or VAT exemption.
The types of event that can qualify for VAT relief is broad and can include a ball, dinner, lunch, disco, barbecue, festival, car boot sale and auction etc. VAT exemption applies to income generated from the event where the event is ‘organised’ and ‘promoted’ ‘primarily’ to raise funds. There is a limit to the number of events which qualify for VAT exemption - a charity can hold up to 15 events of the same type at the same location and VAT exemption can apply.
Regardless of VAT exemption, certain types of income will still be zero-rated in their own right, even where generated at the fund-raising event such as the sale of donated goods, certain food, printed matter, advertising supplied to a charity etc. Whether income is exempt or zero-rated has implications for VAT registration and entitlement to input VAT recovery on costs.
Conclusion / Potential VAT Claims
This article highlights some of the VAT reliefs which are available specifically to charities and not for profit organisations, whether or not the organisation is VAT registered. Early planning to maximise VAT relief is crucial, especially when a charity is considering purchasing property.
Additionally, if having read the above you consider that your organisation has not obtained VAT relief it was entitled to, please do discuss with us the possibility of making a claim for overpaid VAT. Broadly, there is a four year time limit to make corrections to overpaid VAT.
Lyn and Eddie are highly experienced in providing specialist VAT advice to the charitable and not for profit sector and would welcome the opportunity to discuss if any of the above could be applicable to your organisation.
Please do not hesitate to contact Lyn or Eddie for a free initial no obligation consultation on 028 9031 1113 or by email below:
Disclaimer: The views expressed in this article represent an outline of the relevant provisions and are not intended to be exhaustive. No action should be taken on the basis of information contained herein in respect of any specific case without obtaining the necessary professional advice. No responsibility for loss occasioned to any person acting or refraining from action as a result of the material in this article can be accepted by GMcG Chartered Accountants.