VAT Partial Exemption and deferred Non Business income

VAT Partial Exemption and deferred Non Business...

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Hi All

I work for a VAT registered charity that receives Business income, where we charge VAT and Non Business Income (grants).

Year End is 31 March

We received a £30,000 grant for 13-14 financial year (non business income). The grant was paid into our bank account early - 28 March 2013. The income was recorded and deferred to the next financial year. 

How do I treat the grant in partial exemption calculation? Do I include it in 12-13 or 13-14? The amount will considerably change the percentage of input VAT we can recover.

Mike

Replies (6)

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Replying to johngroganjga:
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By mkrola
04th Apr 2013 13:49

We do make exempt supply (we run workshops and courses for which we charge). Yes, it is outside the scope of VAT, correct but it affects our Business / Non business income ratio which determines our residual VAT rate.

 

 

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By johngroganjga
04th Apr 2013 14:07

If it needs to go into the calculation, on which I abstain, it goes into next year's calculation as it is not this year's income.

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Replying to lionofludesch:
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By mkrola
04th Apr 2013 14:14

The charity is promoting sport and physical activity and the grant is capacity funding for employee to help schools run clubs (create new) on school premises, so it represents consideration for a non-busines supply. The only question is does it go in this year's calculation or the next.

 

Mike

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By shaun king
04th Apr 2013 15:00

This isn't Partial Exemption?

If this is Grant income then we are talking about a Business/non business apportionment. Partial Exemption will only apply if you are making Exempt supplies. Although both apportionment methods they are very different. The date of receipt will determine when the money goes into the business/non Business calculation regardless of when the grant is used. 

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Replying to JKnight:
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By mkrola
04th Apr 2013 15:26

Yes, you are right. We are talking about Business / Non Business apportionment. My error, sorry about that. When I first started working here everyone referred to VAT calculations (both Business / Non Business and then taxable / exempt) as partial exemption. I am doing both.

The date of receipt will determine when the money goes into the business/non Business calculation regardless of when the grant is used.

This is what I was after, thanks

Mike

 

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Steve Edwards
By stevo5678
24th May 2013 16:20

If there no service provided then it is not a supply and is not in the scope of vat so no partial exemption.

 

http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_ShowContent&id=HMCE_CL_000097&propertyType=document#P241_37107

 

5.10 Grant funding

Charities often receive funding to support their charitable activities. If funding is freely given, with nothing supplied in return, then no VAT is due as the funding is not consideration for any supply and therefore is outside the scope of VAT.

However, some funding may be given in return for goods or services supplied by the charity. Such funding is consideration for a supply and VAT may be due on the income if the goods and/or services supplied by the charity in return are taxable at either the standard or reduced rate.

Often funding is given subject to the provisions of a contract or agreement, the terms of which may be indicative of the nature of the funding.

However, it is important to note that many such contracts or agreements are drawn up purely to ensure that the funds are used for the intended purpose. It is important not to confuse ‘good housekeeping’ with supplies of goods or services. Attaching conditions or safeguards to the payment of grants to ensure that the money is spent correctly does not turn it into consideration for a supply. Please remember that a contract or agreement can be oral as well as written.

Additionally, certain ‘benefits’ to the funder, for example copies of reports, may arise as a result of necessary safeguards to ensure the money is spent correctly and that the end product is put to proper use. Usually where these are incidental to the primary purpose of the project and are minimal in relation to the amount of funding, the funding is not seen as consideration for a supply.

5.10.1 How does a charity decide whether funding is consideration for a supply?

To decide whether funding is consideration for a supply a charity must ask itself the following questions:

does the donor receive anything in return for the funding?if the donor does not benefit, does a third party benefit instead? And if so, is there a direct link between the money paid by the funder and the supply received by the third party? (See example below.)are any conditions attached to the funding, which go beyond the requirement to account for the funds (commonly referred to as ‘good housekeeping’)?

If the answer to one of the questions is ‘yes’ it indicates that the funding may not be freely given and may be consideration for a supply.

The following example may help to illustrate the difference between ‘grant funding’ which falls outside the scope of VAT and ‘third party funding’ which is payment by one party on behalf of someone else and is subject to VAT.

A Citizens Advice Bureau (CAB) provided free legal, and other, advice. It received grant funding from, amongst others, the local authority. The local authority, as a condition of grant funding, required a service level agreement to be entered into by the CAB, detailing opening times, levels of service etc. On this basis the CAB viewed the funding, and linked agreement, to be consideration for a taxable supply of services to the local authority.

On appeal to the VAT tribunal it was found that there was nothing in the service level agreement to support the CAB’s view. In the Tribunal’s view, although strings were attached to the grant given by the local authority, that in itself did not create a supply. This was because the local authority did not derive any direct benefit from the advice given. Its only benefit was the indirect knowledge that it had helped fund a service that might be of benefit to its citizens. The strings attached to the grant funding were simply good housekeeping measures by the local authority. The only supplies made were to the local citizens and, as these were mainly free of charge, there was no supply for VAT purposes.

The only exception is where legal advice is given by a CAB to a citizen who qualifies for legal aid. In such cases the legal advice given is subject to VAT. This is because the CAB has received specific payment, from a third party, for specific advice given to a citizen.

If you need help deciding whether a charity is making a supply, or on the VAT liability of a supply, please contact our National Advice Service on 0845 010 9000.

5.10.2 Does the use of the funding have any VAT implications?

Where a charity is supported by outside the scope funding, this does not determine the nature of any supplies it makes. In other words, it does not follow that outside the scope income means that the charity will only have non-business activities.

A charity needs to ask itself what activities it will be spending the funding on and whether those activities are business for the purposes of VAT. Please see section 4 for more guidance on business. If you need help deciding whether you are in business please contact our National Advice Service on 0845 010 9000.

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