Charity advice on VAT please

Charity advice on VAT please

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My client is a small registered charity and is soon to purchase trading premises and spend some considerable money on renovation costs. The question has arisen as to whether or not the charity should register for VAT.

In an effort to save fees I would be grateful if anyone can contribute some thoughts which could direct my research.

The charity does have some invoiced income whereby the public are charged a nominal fee for the service provided. A large proportion of the income is by way of council grants.

Thanks to anyone who can help.
stormrider

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By User deleted
25th Oct 2006 10:01

More Info Needed
Charities and purchasing property is always a tricky one regarding VAT.

The invoiced income, is it standard rated/zero rated?. They can register for VAT voluntarily, but any recovery of VAT on the purchase/renovation will be limited to the taxable business activities element of what they do (ie, the sales element).

Example - total income is £100k per annum (incl. grants and sales, etc). If grants make up £50k and taxable sales the other £50k, then 50% of their activities are business, the other 50% non-business. They will only be able to claim 50% of the input VAT associated with the works (as 50% relates to non-business).

If their sales are tiny (ie, a few thousand pounds p/year), then the % recoverable will be very small so the charity will have to increase it's taxable sales if it wants a bigger chunk of VAT back. It sounds like a lot of effort (registering, records) to recover what appears to be a small amount.

What activities will be carried out at the property (ie, is it a going to be a care home, entirely non-business/head office activities, shop + office)?.

If you wish to research further and if registering for VAT is not an option, there are other reliefs such as ensuring contractors zero rate certain parts of the renovations associated with disability access. (ramps, etc) If the property is a listed building, again reliefs are available here. They are most likely entitled to gas/electric at the reduced rate of 5% without need to register.

There is also the Lennartz mechanism (google for it) whereby the charity can recover all input VAT upfront and then repays back to HMRC each year an element of VAT relating to non-business. In your case, this means the charity claims all the VAT now, but then has to pay almost all of it back over a 10 year period. It's not saving the VAT, merely delaying it and improving cashflow. The problem here is that HMRC will raise an eyebrow and also my experience is that if a charity gets a lump sum it will spend it. In this case, the lump sum would have to be ringfenced and eventually most of it repaid, bit by bit each year so would be a high risk proposition to be honest.

If you can give me more detail as per my questions I'll be able to give more specific advice.
Jason

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By User deleted
25th Oct 2006 15:44

Not Sure About That
My understanding was that if you opt to tax a building then rent it, VAT can be applied, but not if it is to be occupied by a charity on non-business purposes (ie. as a head office, rather than a shop).

Also, HMRC may see the forming of a seperate company with the sole and only intention to rent to it's charitable arm, both of which would technically occupy the same property as a means to recover VAT against the spirit of the law.

I'm refering to the Halifax case, being a 100% exempt business, they had a trading arm build a new head quarters, opted to tax it to recover all construction VAT, rented it back to Halifax (technically themselves) with VAT. HMRC disallowed the option to tax on that, a quite recent tribunal dismissed Halifax's appeal and all reclaimed VAT has to now be repaid to HMRC. (probably explains why Halifax keep putting up their charges to make up for this!)

There's absolutely nothing wrong with your advice for a 100% taxable business, just that HMRC will look into any inter-company transactions involving an exempt body such as this charity with almost a guarantee of picking it apart. Also, even if the charity registered for VAT, it couldn't recover the VAT on the rent, only a % based upon it's taxable sales - so you're back to where we started in a way with an inability to recover all the VAT. Personally, that's an awful lot of admin and costs (setting up a trading arm, etc) just to still charge VAT on the rent which still can't be recovered. It would aid cashflow for sure, but then the Lennartz mechanism in my earlier post would do that without the need for complex trading arrangements, although the risk of blowing all that upfront cash would still exist unfortunately.

I suppose it depends upon how much VAT is at stake but Charities would unlikley want the costs of a tribunal to possibly win the point or exposure to potential bad press over what could be seen as tax avoision to the man in the street.

Electing to tax will not affect the future worth of property as the election is with the current (VAT) registered person. The seller could choose to opt to tax and then upon the sale of said property choose not to charge VAT (but they usually do) as the buyer then has the option to tax or not, assuming the buyer is VAT registered also. Usually, once a building is opted it stays that way as the seller will charge VAT, so the buyer opts to tax too to recover input VAT and so on. If being sold to a non-registered person, that person would likely choose to waive said election and the seller could choose to sell without VAT, but then the 10 year rule applies meaning if they built the property and recovered all the VAT on it, should then sell it without VAT within 10 years then they'd have to pay an element of that recovered VAT back to HMRC, which is why once opted, a building stays that way. But then we stray into an even more complex part of VAT!.

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By stormrider
25th Oct 2006 11:03

Thank you Jason
Your comments have echoed my own preliminary concerns.

I will discuss with the charity the extent to which they make taxable supplies and if the % is significant we may proceed.

I will keep you informed as matters progress.

Thank you for you interest and helpful comments.

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By SteveReynolds
25th Oct 2006 14:35

Another way perhaps
Perhaps another route to at least consider is to form a company which is owned by the Charity Trustees which then purchases the property and leases the property to the charity. The company could then elect to tax and recover all vat on the property. It would then charge vat on the rent, but this could be recovered by the charity if it registers. This approach could help to prevent any irrecoverable vat on the alterations. However, you would need to check out how much vat is involved and whether it is worthwhile. Also will electing to tax prevent a future sale of the premises or affect its value. A decent property surveyor could answer these points.
Steve

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