VAT mess not charging VAT to charities

AuntyCat

As people have already said and to clarify for others -

There are very few supplies that are zero rated when sold to a chariry (ie not normally zero rated items). A lot that are relate to medical items or items designed for the use of pepole with a disability, also some advertising.

If you deal with a charity and they ask you to zero rate your supply it is up to them to produce a certifoicate to show they are a charity and that the item is one that can be zero rated AND that the item is to be used for the purpose that entitles it to be zero rated.

As the supplier it is up to you to be satisfied that all is as it seems & if reasonable steps have been taken to do this HMRC will take this into consideration.

In this case, you say that you just took their word for it so yes, the outstanding VAT is your liability. The HMRC officer will rase an assessment and you will need to issue a VAT only invoice as your accountant suggests. It's then up to you to get the money from the charity by which ever method mentioned above.

Do ask debt management for time to pay if it's a large amount.

I don't think you have said what your supply is? Maybe it is one that can be zero rated? VAT Officers do make mistsakes sometimes !

JasonLVC

You could consider treating your invoices (without VAT) as VAT inclusive. It will reduce your actual turnover for the years in question but it will mean you don't have to find quite as much VAT.

eg. Invoice raised for £1,000 (no VAT). You now realise you should have charged VAT. Ordinarily you'd just raise VAT only invoice for £200 and customer pays it but here, the customer has told you they will not pay it.

Instead of raising an invoice for £200 VAT, just consider the original invoice for £1,000 was VAT inclusive. This means you still owe HMRC VAT but it will be the VAT fraction of £1,000 (£166). This also means your turnover is reduced from £1,000 to £834 so you may be able to reduce any business taxes you paid previously on profit (which is now reduced).

Its not a brilliant solution but I'd rather pay out £166 VAT instead of £200 if its coming out of my own pocket.

Also consider bad debt relief reliefs, if the VAT only invoice is not paid, you can claim 1/6th of the VAT only value, (alas, not all of it), so if the VAT invoice was £200 as per example, then you can reclaim back from HMRC £33.33 (£200 x 1/6) so combing these two approaches can reduce your VAT bill.

The customer may then be more agreeable to paying the difference maybe.

The nuclear option remains.....if you are a Ltd company, then just set up a NewCo, get it VAT registered first and then collapse your old company leaving the VAT debt in the company. Not morally brilliant but hey, that's the point of a Ltd company structure.

paddyrg

Just for note, VAT inspections are catching, so the charity are likely to have a pretty thorough inspection now.

Buzby

There is only an error by the vendor - the charity can say the moon is made of blue cheese but like VAT, whether the vendor believes it or not it is up to them. The error in supplying the goods zero rated to the charity remains with the supplier, any attempt to pursue them for any shortfall will depend on their goodwill and it appears this will not be forthcoming.

In this situation it is wiser to learn and move on.

paddyrg

What I don't get is if they're VAT registered, why they won't pay an all-VAT invoice which they simply reclaim.

If they have been claiming/recovering VAT against the existing invoices, they have bigger problems ahead when HMRC investigate

motorguy

Buzby wrote: »

There is only an error by the vendor - the charity can say the moon is made of blue cheese but like VAT, whether the vendor believes it or not it is up to them. The error in supplying the goods zero rated to the charity remains with the supplier, any attempt to pursue them for any shortfall will depend on their goodwill and it appears this will not be forthcoming.

In this situation it is wiser to learn and move on.

+1

Supplier at fault here.

JasonLVC

paddyrg wrote: »

What I don't get is if they're VAT registered, why they won't pay an all-VAT invoice which they simply reclaim.

If they have been claiming/recovering VAT against the existing invoices, they have bigger problems ahead when HMRC investigate

Vat registered charities, generally can only reclaim some of the vat they get charged, not all of it like normal businesses can.

So they could still accept vat invoice but offer to only pay what they can reclaim.

carlsagen

JasonLVC wrote: »

Vat registered charities, generally can only reclaim some of the vat they get charged, not all of it like normal businesses can.

So they could still accept vat invoice but offer to only pay what they can reclaim.

I have done some reaserch and its not clear what amount the charity can reclaim. For reference its cleaning services which doesnt fall under the zero or reduced rate.

That said HMRC website says;

When you must register for VAT
You must register for VAT if your charity’s VAT taxable turnover (the total value of everything you sell that isn’t exempt from VAT) is more than £82,000.

You can choose to register if it’s below this, eg if you want to reclaim VAT on your supplies.

Which indicates it can be claimed back anyway? It doesn't go on to say if this is a reduced amount nor can i find any evidence of that reduced amount.

This would be helpful is it would reduce the amount i will have to pay due to the mistake.

JasonLVC

carlsagen wrote: »

I have done some reaserch and its not clear what amount the charity can reclaim. For reference its cleaning services which doesnt fall under the zero or reduced rate.

That said HMRC website says;

When you must register for VAT
You must register for VAT if your charity’s VAT taxable turnover (the total value of everything you sell that isn’t exempt from VAT) is more than £82,000.

You can choose to register if it’s below this, eg if you want to reclaim VAT on your supplies.

Which indicates it can be claimed back anyway? It doesn't go on to say if this is a reduced amount nor can i find any evidence of that reduced amount.

This would be helpful is it would reduce the amount i will have to pay due to the mistake.

Any business, whether charity or for profit, can only reclaim VAT on purchases that relate to their VATable sales. So everything that you sell is VATable, you get all your VAT back.

A charity tends to have a mixture of VATable and non-VATable sales. A contract with the local council to provide debt advice would be VATable. A grant and donations are exempt of VAT/not VATable.

So a typical charity will say have £100k VATable income and £100k of exempt income. In this simple example, it means the charity can reclaim 50% of the VAT it incurs on purchases, the 50% relates to the taxable income.

If your invoice was for £1,000 + £200 VAT and the charity can only reclaim 50% of input tax, then it can only reclaim £100 of the VAT you charged, the other £100 is a cost to the charity.

Your charity client may only be able to reclaim 8% or 30% (or another % based on their incomes) of the VAT on purchases and so you should ask the customer "what their partial exemption recovery rate is" and that percentage is what VAT they can reclaim.


The fact they are VAT registered confirms they should be recovering some amount of VAT because if they didn't make VATable sales they can't register for VAT, but that does not indicate what level of VAT they can reclaim. It could be very small or very big depending upon what they do and where their income comes from. They may not tell you this, but it is worth a punt.