Save content
Have you found this content useful? Use the button above to save it to your profile.
AIA

Court confirms VAT apportionment for charities

by
11th Oct 2005
Save content
Have you found this content useful? Use the button above to save it to your profile.

A recent decision in the High Court has confirmed the way charities should apportion VAT for business and charitable activities.

HMRC has decided not to appeal the decision in the Church of England Children's Society (CECS) case.

CECS employs professional fundraisers to secure regular donations from members of the public. Those donating at least £5 per month receive a copy of the charity's newsletter three times a year.

The issues were whether VAT was recoverable on the fundraisers' fees and the costs of producing the newsletter.

To decide on the issue of the fundraisers' fees, the High Court followed the recent judgment of the European Court of Justice in Kretztechnik AG v Finanzamt Linz. This means that if the capital-raising transaction is for the purpose of the business's economic activity, then it has a link with the whole economic activity of the taxable entity and VAT is recoverable to the extent that the taxable person is making taxable supplies.

This part of the CECS decision has wider implications than the use of professional fundraisers ' it also impacts on the recovery of any VAT incurred in securing donations or legacies to support a charity's work.

The Court also upheld the VAT tribunal's decision that a newsletter was a deemed zero-rated supply of printed matter and that input tax on the production and distribution costs could be recovered because it related to the deemed supply.

As far as HMRC is concerned, this decision means that when a charity raises funds solely for a restricted charitable purpose involved wholly non-business activities, the VAT incurred is not recoverable because it is not input tax.

But where funds raised are used wholly to support the making of business supplies, then all VAT incurred can be treated as input tax. Whether it is recoverable will depend on whether the business supplies are taxable or exempt in the normal way. The normal partial exemption limits will also apply.

In most cases a charity will have both business and non-business activities. In these cases the VAT incurred on fundraising costs must first be subject to a business/non-business apportionment.

When the charity has exempt business activities, this input tax is then subject to the partial exemption rules.

In many cases charities' existing apportionment and exemption methods will provide a fair result but in cases where this isn't so, HMRC will consider proposals for alternative methods.

Charities that wish to make claims for input tax can do so subject to the standard three-year time restriction on the due date for the prescribed accounting period.

Further information and examples of how the ruling affects deemed supplies and how to make a claim can be found at: http://www.gnn.gov.uk/Content/Detail.asp?ReleaseID=172729&NewsAreaID=2

Tags:

Replies (0)

Please login or register to join the discussion.

There are currently no replies, be the first to post a reply.