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VAT – pitfalls and planning

Jan 04, 2011

The world of VAT is not an easy one for charities. A common misconception is that charities don’t pay any VAT. Well, there are reliefs available for activities and expenditure, but they are not obvious and it is easy to get them wrong. Below are a few issues that are raised on a regular basis with charities:

Pitfalls

  • 5% VAT rate for fuel – This lower rate of VAT is only applicable where a charity uses the fuel for a “non-business purpose”, which is not always the same definition for VAT law and charity law. Care should be taken when issuing certificates as penalties may be levied for their incorrect issue.
  • Constructing new non-residential buildings – These projects, by their nature, are expensive and significant amounts of VAT are involved. However, complex sale and leaseback arrangements are now being attacked on a regular basis by HMRC to counter the recovery of VAT.
  • VAT exemption for educational activities – In order to qualify for the education exemption from VAT, charities must be able to show that it is not possible for any profits to be distributed. In addition they must also show that any profits from the provision of education are re-invested solely in the future provision of education and not for the benefit of the charitable activities as a whole. Failure to incorporate the latter into the aims and objectives or Articles of Association can mean that the education provided is actually taxable and not exempt.

Planning

  • Charities can benefit from zero-rating for their advertising (including staff vacancy advertisements), as well as for most printed matter. In addition, if the printer can provide an inclusive design and print service, this may also be zero-rated.
  • Construction services – If a new accommodation building is being planned, then it would be worth considering a “design and build” contract in order to take advantage of zero-rating.
  • Sales of donated goods (e.g second hand uniforms) can be zero-rated.

By Ruth Corkin, VAT Manager, James Cowper LLP a leading firm of accountants and business advisers with a specialist focus on the charities and education sector.  

www.jamescowper.co.uk




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