[cma-l] Charitable Status

[Two Lochs Radio]

Hi Eddie

It sounds as if your VAT Officer either has a weak grasp of this peripheral area of VAT, or is simply 'trying it on' (remember they effectively operate as business units with 'profit' targets to reach).

Of course your question doesn't have anythign to do with charitable status - charities and other not-for-profit organisations are generally subject to the same VAT rules as any other organisations. There are some specific reliefs and exemptions for charities, and some others for other non-profits (see http://www.hmrc.gov.uk/charities/vat/intro.htm), but you are not claiming any special reliefs here, just claiming normal treatment of VAT for a trading business.

Assuming the position has arisen because you are spending grant money and other reserves on new equipment etc, HMRC may respectfully inquire why the imablance has occurred, but once you've explained, they have to live with it. The proper response to their inquiry would usually be along the lines:

"We are currently in a [setup/expansion]* phase in which we are spending significant capital reserves on [new plant/building/etc]*, which is causing our VAT output to be considerably higher than inputs at the moment. When this [setup/expansion]* is largely complete we anticipate returning to a more balanced VAT position on routine trading."

*as applicable in your case.

This is entirely proper and understandable. It is just the same situation as for profit-making businesses, where setup or expansion costs may be met from capital in the form of share or subsidy/grant income, neither of which are within the scope of VAT, but the resulting expenditure is within the scope and can be reclaimed. More to the point, if you are VAT-registered, your grant funder will require you to reclaim output VAT and will exclude VAT from the calculations of how much grant you are eligible for.

Bear in mind that in receiving grants and buying equipment with them you are not 'adding value' to goods and services, which is the basis of VAT. Most of the valiue of the grant is staying within your business in the form of fixed assets,, and the VAT man can be presumed to gain eventually from your capital expenditure because it increases your ability to provide goods and services that do attract VAT.

To quote HMRC:

"A freely given donation for which nothing is given in return is non-business income and is outside the scope of VAT. You might receive grant funding to support your activities. If this funding is freely given, with nothing supplied in return, it is outside the scope of VAT."



If the terms and conditions attached to the grant are such that the funding is given in return for goods or services supplied, then this may count as a taxable business activity and VAT may be payable on the funding income, but that is not the case with normal grant funding and donations where the donation is explicitly for the organisation to apply it to its own objectives.



The position would be different if, for example, you were given a grant purely to enable you to produce some public service announcements, or to make a specific series of programmes. That would be trading income and subject to VAT just like any advertising or sponsorship sales. Even so, it would not affect the position on reclaiming output tax, but you would likely have a net return of VAT to HMRC.


As I mentioned in an earlier posting on Ian Hickling's thread, for VAT purposes, 'business' does not necessarily mean 'making a profit'. Non-profit activities, or activities on which traders simply cover their costs or even make an ongoing loss can still be 'business' for VAT purposes.



Conversely, any businesses (including non-profits) may have within them activities and income that are classed "non-business activities", although the receipt of non-business income (income for which nothing is supplied in return, eg grants and donations) is only an indication that a trader might have non-business activities; it is not evidence that a trader definitely has such activities. 



Crucially in your case: traders may have non-business income without having any corresponding non-business activities, and non-business income can be used to support business activities. This does not mean that the supported business activities become part non-business and part business, with VAT being able to be reclaimed on some but not on others.  Using non-business income on a business activity simply makes it a subsidised business activity - it doesn't change the VAT position on output tax.


I would try the simple straightforward explanation as above first (though your treasurer may have gone past this stage already and offered them a glimmer of false hope that they can stiff you for the output VAT!). 

If your VAT Officer still plays dumb after receiving the straightforward and proper explanation, I would not state that he/she is wrong (that will only antagonize them), simply restate that your understanding of the situation is that you are making normal business expenditure on which you are entitled to reclaim output tax, and the fact that some of it is funded from grants or capital sources outside the scope of VAT does not preclude you from reclaiming the output tax. A follow-up letter could refer him/her to HMRC internal control note V1-37 which sets this all out officially.

It sounds like your VAT officer might be trying to make you think your activity should be treated as a specific activity outside the scope of VAT in the way that, for example, a fundraising event can be declared outside the scope of VAT where this is advantageous to you. In those situations in return for not having to levy input VAT on ticket sales etc, you can elect ro declare an entire event or activity outside the scope of VAT, and in return cannot of course reclaim output tax. 



But that is a special case that you can elect to use in appropriate cases (such as a fundraising party), not the normal situation of subsidized expenditure of business reserves on new equipment etc.  Your situation is that you are simply carrying on a normally business activity using funds some of which happen to have come from non-business sources.



Incidentally, there are a number of businesses where the ongoing and proper position is that they are net recipents of VAT repayments (for example book printers, transport operators). It happens that radio is not one of the business categories that is commonly VAT negative, so it is reasonable for them to have inquired why you were claiming more in than out.



Health warning: I am not an acountant, so my comments are not legally reliable, but I have been around this loop a few times, have had to 're-educate' our qualified accountant on certain VAT matters, and have had no problems during a VAT inspection.


Alex






----- Original Message ----- 
  From: Eddie Winship 
  To: Ian Hickling ; office at ccr-fm.co.uk ; Glyn Gloss ; cma-l 
  Cc: johnstannard1946 at yahoo.co.uk 
  Sent: Sunday, February 06, 2011 9:44 AM
  Subject: Re: [cma-l] Charitable Status


  Hi All
  Sod’s Law dictates that not long after my last input re VAT, I had a rather disturbing telephone call from our Treasurer. Some weeks ago we had a letter from HMRC why we had reclaimed so much more VAT than we paid. He gave them details of our finances and they have now come up with the wonderful idea that we can only claim VAT refund on items we have paid for with money we have earned and not with money received as grants!

  We are going to seek advice on this but I’d be very interested to learn if anyone else has come across this one?

  Frankly, the VAT we might have to pay back is more than the pitiful amount we have in reserve!

  Eddie

  Eddie Winship
  Chair, Reading Community Radio. Reg Charity No. 1119557
  Streaming as Reading4u on www.reading4u.co.uk 
  Walford Hall, Carey Street, Reading RG1 7JS
  Tel: 0118 327 9774
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