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Two VAT-saving tips for charities

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9th Jun 2009
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Neil Warren was the 2008 Tax Writer of the Year. He is an independent VAT lecturer and his seminar programme includes a ‘VAT and Charities’ seminar that is available for delivery to interested branches and groups across the UK. In this article, he highlights two important VAT saving tips for charity clients and other non-profit making bodies.

Many practitioners have charity clients or clients who are VAT registered as a non-profit making body. Equally, many other advisers are members of golf, drama or rugby clubs and occasionally (or frequently if the truth is known!) get asked for a few tax saving tips to help the cause.

In this feature, I would like to highlight two VAT saving tips that I know are not being fully utilised. The first tip relates to saving VAT on fund-raising events and the second about saving VAT on advertising costs. The latter tip is only for charities – the former also includes most non-profit making bodies as well.

Fundraising income is exempt from VAT

Example: Stockfield Golf Club is a non-profit making club and is organising a ‘Celebrity Dinner’. The club will sell 200 tickets priced at £35 each. The food is being provided by a VAT registered caterer (£12+VAT per meal) and the only other costs are for a comedian and guest speaker (£1,000 – no VAT).

What are the VAT issues?

As it stands, the dinner is classed as a social event and output tax will be payable on the ticket sales (200x£35x3/23 = £913) but input tax will be reclaimable on the caterer charge (£12x15%x200 = £360). So the VAT man’s coffers are boosted by £553.

However, a concession within the legislation (VATA 1994, Sch 9, Group 12) is that income from a fundraising event organised by a non-profit making body or charity is exempt from VAT. There are limitations on the quantity of qualifying events that can be held by a body within its financial year (15 events of the same kind in the same location) but these are very generous.

So what are the solutions for Stockfield Golf Club in my example? Here’s my three point plan: 

  • Change the description of the event to ‘Celebrity Fundraising Dinner’ and record this description on all publicity material and ticket
  • Identify a potential project for the profits made by the event and record this in the minutes of the club’s committee meeting. As a football club treasurer, I can confirm that there are always lots of calls on cash – and the last fundraising dinner we organised was to ‘raise funds for summer pitch improvement works.’ The ticket sales are now exempt from VAT (no output tax payable), producing an output tax saving of £913. The input tax on the caterer’s charges can no longer be claimed as it relates to an exempt supply – but Stockfield is still better off by £553.

Note – I have a rugby club client who is able to get an even better result than Stockfield because they are deminimis for partial exemption purposes (exempt input tax is both less than £625 per month and 50% of total input tax) so they get input tax back on their caterer’s charges as well.

As a final point, VAT exemption applies to any income generated at a fundraising event. So if Stockfield sold advertising space in the dinner menu or T-shirts as the guests arrive, these sales will also be exempt.

Advertising costs

The comment I always make about VAT and charities is that they do not get special treatment in relation to the tax but they do get some very important and worthwhile concessions.

One concession is that advertising supplied to a charity is zero-rated, unless it relates to advertising for one of its trading companies (VATA 1994, Sch 8, Group 15). The reason this concession is so important is because many charities are unable to fully recover VAT they are charged on their expenses as input tax due to non-business or partial exemption issues. In fact, many charities are not VAT registered because they have minimal or no taxable income.

Let me give three examples of when advertising expenditure for a charity is zero-rated:

  • Save the Animals Ltd is a registered charity and places an advert in the local newspaper for a new Chief Executive.
  • Save the Animals Ltd is organising a Christmas appeal and has placed an advert on the local radio station asking for cash donations to be sent to its local office
  • Save the Animals Ltd wants to place an advert on Accounting Web encouraging tax advisers to give some of their time walking the stray dogs they look after

Taking the above situation a stage further, and relating to an actual query I was recently asked, what happens when a charity has been unaware of the above rule for the last ten years and has paid VAT to all of its advertising suppliers?

The good news is that there is scope for the supplier to issue a VAT credit note for the last three years to correct the overcharged VAT that has taken place. However, overpaid VAT for the seven years before then is out of time and cannot be adjusted.

The supplier should be provided with evidence of charitable status (see HMRC Notice 701/58/02, Part 10 for an example of a suitable format).

The value of the VAT credit note will either be repaid by the advertising supplier (cheque, standing order etc) or posted as a credit to the charity’s ledger account. The credit note should then be posted through the charity’s books and records, with the same VAT treatment as the original invoices (i.e. according to partial exemption allocations).

The end result of both my tips is hopefully an improvement to the bottom line profit of the charity or non-profit making body (or bottom line surplus to be totally correct) and that is good news for us all.

Neil can be contacted for VAT lectures or VAT support for accountants at [email protected]

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