Top VAT errors seen in charities
1. VAT is the most complex and expensive tax that most charities have to deal with and it brings many potentially problematic areas. Here are our top five examples of common errors found. Wrongly attributing an income stream as grant funding when it is in fact a fee for the provision of services. If there is a clear benefit to the payer then the payment is likely to be a fee for the provision of services to the payer, but if the true beneficiaries are the recipient of the funding or the wider public then the payment can usually be seen as a grant free of VAT.
2. Corporate donors rarely make a donation to a charity without expecting something in return. Normally this is in the form of recognition via the charity website or marketing material in either written form or via a company logo, or perhaps use of the charity’s logo on their materials. Volunteering opportunities for staff is also commonplace. This type of donation makes the payment liable for VAT.
3. VAT is due on supplies of services between the charity and its trading subsidiary, unless the two are in a VAT group. We often see this in staff sharing situations when staff are not jointly employed by each entity.
4. VAT can only be recovered on costs to the extent the charity makes VAT taxable supplies. VAT cannot generally be recovered on grant and donation funded activities, and cannot be recovered on VAT exempt activities (subject to the VAT partial exemption de minimus) and can only be partly recovered on central costs and mixed activities.
5. Finally don’t forget the VAT reverse charge. If you are VAT registered and undertake fee charging activity you may need to charge yourself VAT on the value of services received from abroad, and can then recover that VAT or not, depending on how the services are used. Even if you are not VAT registered but have fee income; if the value of services bought in exceeds the compulsory VAT registration threshold then you will have to register for and charge yourself VAT under the reverse charge. This is supposedly to create a VAT level playing field between UK and overseas suppliers of services. Few charities get this right.