VAT Relief for Charities

JasonLVC

Mummy_Jo wrote: »

Brilliant! - Thank you - things are slowly becoming clearer.

The PTA is a registered Charity. I wasn't the treasurer last year but I can remember some basic facts from the accounts in that the Annual Turnover is about £55 000 - of which £45 000 is from the one event. The rest is raised through other much smaller events and donations throughout the year. I assume then that all income would be exempt (under the charity comm guidelines) from VAT given this...

Could we still register for VAT in order to be able to claim back the VAT incurred on event costs and things purchased throughout the year given that probably 99% if not 100% of the income is likely to be VAT exempt?

Jo

From what I have understood from your post JasonLVC the answer to my question is probably no...

You can only register for VAT if you make 'taxable' supplies. We know your dinner dance event is exempt from VAT (ie, not a taxable supply) and so if the remainder of your income is taxable, then you could register for VAT. Donations, grants and other fund raising are actually outside the scope of VAT and so it appears you don't make any 'taxable' sales (such as selling uniforms for instance)

Anyway....you could only reclaim input tax (VAT on purchases) relating to taxable sales and seeing as you don't have any renders VAT registration pointless. You cannot reclaim input tax on an exempt activity, thus your exempt dinner dance means no input tax reclaimed on the costs of that event - whether you're VAT registered or not.

So basically, as you are begining to find out, charities get a very raw deal in terms of VAT.

Mummy_Jo

Once again thank you very much for your information...

Yes I am beginning to see that Charities do get a raw deal.

Just thinking out loud now and I haven't put a lot of thought into it... so I'm not sure how legal it is...

We do get donations from companies etc... If they were billed for the catering would they be able to reclaim the VAT themselves (assuming they wer registered for VAT)?

So, instead of sponsoring an item or making a donation they would pay for the catering or a proportion of it.

Is this allowed?

JasonLVC

Nothing wrong with thinking aloud.

Donation, freely given with nothing in return is Outside the Scope of VAT.

Sponsorship is usually a standard rated supply (of advertising/marketing). So if a sponsor gives you £5k for an event then if they get nothing for that £5k (ie, no advertisement, hoarding outside ther school, etc) then it is income for you that is Outside the Scope of VAT. If the sponsor gets something in return (and they usually do, even if it is their logo on a programme/brochure), then the £5k received from them goes towards your VAT registration threshold (currently £70k), so you could take in sponsorship and declare VAT on that as your 'sales' so to speak b ut your input tax recovery would be restricted to the advertising aspect only (ie, if you produce a hoarding/sign with their logo on it for instance). You cannot reclaim any VAT on the catering as you've not had anhy money from the sponsor for that.

As for the scenario of the caterer billing the sponsor company directly......the right to reclaim input tax is on the basis that the company has incurred VAT (ie, the invocie is addressed to the business) and that the expenditure incurred was for a business purpose.

You might fall down on the last part. A company buying someone elses dinner (in effect). HMRC would ask where the business purpose is here for the company and this means HMRC want to see a taxable sales (something being sold with VAT on it), that relates to the VAT being reclaimed (the catering) and I suspect the sponsor will struggle to justify it.

For example, I'm VAT registered, you're not. I buy a new Apple Mac and reclaim the VAT and then simply give this to you (becuase you cannot reclaim VAT). The VAT I have just reclaimed would now need to be paid back to HMRC as I've not made a taxable sale of the computer, as I've given it away.

I could reclaim the VAT on it and then sell it to you at cost but whatever price I charge, I'd have to add VAT. I don't want to be out of pocket on this deal so I'll charge you the actual cost I bought it for myself, meaning you still get charged VAT and might as well have bought it yourself. If I sell it to you for less than I paid for it (ex. VAT), then I'd be losing out and you'd be gaining so I'll not do that unless I'm feeling particularly charitable.

There are two supplies here. One of sponsorship to you from the sponsor (for marketing) and then one supply of tickets from you to the customer. For the catering to be recoverable by the sponsor, they'd have to sell the tickets.

Sorry to present negatives all the time, there are some contrived ways to arrange things to avoid the VAT but they are not without risk and usually only worth it when big sums are involved.

But keep on thinking aloud, keep on posting and we might find a new loophole together.

fengirl_2

They can only reclaim VAT on items bought for use in their business, so that would be tax evasion.

Mummy_Jo

okay okay- Gosh I am learning today... Get those neurons firing :T

So, If we had a company who sold tickets on our behalf and they then paid for the catering bill using the income from the ticket sales as well as their sponsorhip they would be able to reclaim the VAT on the catering?

Would be they be liable to VAT on the sale of the tickets too? - So in effect we woul have to put up the cost of the tickets to cover the shortfall???

How I would love to find a loophole right now...

Jo
xxx

timnicebutdim_2

Mummy_Jo wrote: »

okay okay- Gosh I am learning today... Get those neurons firing :T

So, If we had a company who sold tickets on our behalf and they then paid for the catering bill using the income from the ticket sales as well as their sponsorhip they would be able to reclaim the VAT on the catering?

No, as the cost to the business of catering for another organisation is a non-business activity. How about simply asking for corporate donations??

Although the VAT situation with charities appears mean there are other benefits that charities get such as:

-no corporation tax to pay on profits/surplus
-reduced business rates
-reduced energy rates
-no output VAT on many goods/services (as they are exempt, zero rated or outside the scope of VAT)
-VAT input relief on many goods/services as listed previously (e.g. advertising, disability aids etc.)

So in many ways charities have competitive advantage over private sector companies, hence why there are often so many charity shops in the highstreet.

Mummy_Jo

timnicebutdim wrote: »

No, as the cost to the business of catering for another organisation is a non-business activity. How about simply asking for corporate donations??

We don't get donations as such - companies offer to pay for certain things... like the cheeseboard, printing of menus etc... in offer of recognition

Would there be a benefit to us changing that then do you think?

JasonLVC

Mummy_Jo wrote: »

okay okay- Gosh I am learning today... Get those neurons firing :T

So, If we had a company who sold tickets on our behalf and they then paid for the catering bill using the income from the ticket sales as well as their sponsorhip they would be able to reclaim the VAT on the catering?

Would be they be liable to VAT on the sale of the tickets too? - So in effect we woul have to put up the cost of the tickets to cover the shortfall???

How I would love to find a loophole right now...

Jo
xxx

Yes, if you got a company to arrange the whole thing, they'd charge VAT on the tickets but be able to reclaim all the catering VAT back for themsevles. Bottom line is if you want to reclaim VAT, you have to charge it as well.

Then you have the small problem of how the company then gets the takings for that event over to you. For it to be able to reclaim the VAT it just has on catering/venue costs, it has to make an onward supply with VAT to someone (you). So to get your £40k ticket sales they'd have to account for VAT on this 'sale' to you so you'd only get (£40,000 x 7/47 = £5,957) meaning you'd get £34,043 from the company with the £5,957 being paid over to HMRC by them. So you still end up down/out of pocket on the project.

timnicebutdim_2

ah sorry i see what you mean now, i thought you meant the external company would be providing the catering and ticket sales, not running the whole shaboodle.....

what i meant by corporate donations is would there be anyone willing to donate either money or goods/services for the event - social corporate responsibility kinda thing? If this is unlikely then maybe their donations could be restricted funds i.e. to a certain cause, like a new science block or educational trips. For them this might be more of an incentive to donate.. i know this doesn't address the vat issue but it might be a way of raising more funds and therefore reduces the magnitude of the vat cost.

If this is a no go then how about the sponsorship route in return for advertising as mentioned by Jason earlier?

Mummy_Jo

Thanks for your replies - once again...

We do offer sponsorship in return for advertising already and do get quite a good contribution from local businesses. Its just that it seems unfair I guess that such a high proportion of money goes on VAT... We have heard rumours from some of our suppliers that they think it will increase next year to 20%:eek: Now obviously these are just rumours and need to be treated as such but I would like to do my homework to see if there is any way that we can reduce the overall VAT bill.

We do pay VAT on other things throughout the year too but it pales into the background when you consider the catering bill...

I am open to any suggestions - even using a third party to run the catering and sell the tickets - but how would I work out if that was a profitable way to go? - and even if it was worth it...

Jo
xxx