In our first Charity VAT blog, we looked at the various VAT reliefs that may be available to you as a charity. Moving on from the expenditure side, in this Blog, we will start to look at the issues that Charities have to consider from an income point of view.
Some charities will be relatively straight forward with only one or two income streams to worry about, whereas others may generate income from a variety of sources; which may be standard rated, zero rated, exempt or outside the scope of VAT. Getting the treatment right is vital as once your charity’s taxable income exceeds £85,000, you will be required to register for VAT.
Grant funding or Service payment
One of the key issues that many charities have to address is whether the payment they receive is grant income, which will generally not be subject to VAT, or a service payment for which the funder receives a tangible benefit in return for their payment. Where there is a clear reciprocity between the funder and the charity, this is likely to be a supply for VAT purposes.
Over the years, as funders respond to the need for greater scrutiny and accountability for the use of their funding, the underlying agreements have become increasingly complex. Consequently, it may not be as straight forward to determine whether the payment being received is a voluntary grant or payment for a service. Importantly, good “housekeeping” conditions contained within a funding agreement, which simply seek to ensure and demonstrate that the funds have been put to their intended purpose, would not be seen as a tangible benefit provided to the funder.
However, where the payment does relate to a service, it is vital that this is identified at the outset and the correct VAT treatment applied. Otherwise the charity may have prepared the projects budget on the assumption that no VAT is due and then find themselves, sometimes after a number of years, having to account for VAT out of the funding already received; seriously jeopardising the future of the charity.
Another area that can often catch out a charity is sponsorship. Again, where the sponsor receives a significant benefit (which can often be in the form of advertising but may also be the right to free or discounted admission to events), this will be seen as a taxable supply. As with service payments, it is vital that sponsorship income is correctly identified as it could lead to a VAT registration requirement that the charity was not aware of.
With the increasing incidence of headline fund-raising campaigns, such as sculpture trails, the success of a campaign can be negated where the correct treatment of the income generated is not identified at the outset.
Once the level of taxable income exceeds £85,000, it will be necessary to notify HMRC of the registration requirement within 30 days. Failure to notify HMRC may result in significant penalties. However, these can be avoided if the appropriate action is taken timeously.
The VAT treatment of a charity’s income is rarely straightforward and it is always beneficial to take professional advice. If you have concerns around the VAT treatment of your charity’s income streams, please contact Alistair Duncan, Director (firstname.lastname@example.org) or your usual AAB contact.