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<DIV><FONT face=Arial>Hi Eddie</FONT></DIV>
<DIV><FONT face=Arial></FONT> </DIV>
<DIV><FONT face=Arial>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).</FONT></DIV>
<DIV><FONT face=Arial></FONT> </DIV>
<DIV><FONT face=Arial>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 <A
href="http://www.hmrc.gov.uk/charities/vat/intro.htm">http://www.hmrc.gov.uk/charities/vat/intro.htm</A>),
but you are not claiming any special reliefs here, just claiming normal
treatment of VAT for a trading business.</FONT></DIV>
<DIV><FONT face=Arial></FONT> </DIV>
<DIV><FONT face=Arial>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:</FONT></DIV>
<DIV><FONT face=Arial></FONT> </DIV>
<DIV><FONT face=Arial>"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."</FONT></DIV>
<DIV><FONT face=Arial></FONT> </DIV>
<DIV><FONT face=Arial>*<EM>as applicable in your case</EM>.</FONT></DIV>
<DIV><FONT face=Arial></FONT> </DIV>
<DIV><FONT face=Arial>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.</FONT></DIV>
<DIV><FONT face=Arial></FONT><FONT face=Arial></FONT> </DIV>
<DIV><FONT face=Arial>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.
<DIV><FONT face=Arial> </DIV></FONT></FONT></DIV>
<DIV><FONT face=Arial>To quote HMRC:</FONT></DIV>
<DIV>
<DIV><FONT face=Arial></FONT> </DIV>
<DIV><FONT face=Arial>
<P added="null">"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."</P>
<P added="null"> </P>
<P added="null">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.</P>
<P added="null"> </P>
<P added="null"><FONT face=Arial>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.</FONT></P>
<DIV> </DIV>
<P added="null">As I mentioned in an earlier posting on Ian Hickling's thread,
f<FONT face=Arial>or 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.</P></FONT>
<P added="null"> </P>
<P added="null">Conversely, any businesses (including non-profits) may have
within them activities and income that are classed "non-business activities",
although t<FONT face=Arial>he receipt of non-business income (income for which
nothing is supplied in return, eg grants and donations) is only an indication
that a trader <EM>might</EM> have non-business activities; it is not evidence
that a trader definitely has such activities. </FONT></P>
<P added="null"><FONT face=Arial></FONT> </P>
<P added="null"><FONT face=Arial>Crucially in your case: traders may have
non-business income without having any corresponding non-business activities,
and n<FONT face=Arial>on-business income <U>can</U> 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.</FONT></FONT></P></FONT></DIV></DIV>
<DIV><FONT face=Arial></FONT> </DIV>
<DIV><FONT face=Arial>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!). </FONT></DIV>
<DIV><FONT face=Arial></FONT> </DIV>
<DIV><FONT face=Arial>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. </FONT><FONT face=Arial>A follow-up letter could refer him/her
to HMRC internal control note V1-37 which sets this all out
officially.</FONT></DIV>
<DIV><FONT face=Arial></FONT> </DIV><FONT face=Arial>
<DIV>
<P added="null">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. </P>
<P added="null"> </P>
<P added="null">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.</P>
<P added="null"> </P>
<P added="null">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.</P>
<P added="null"> </P>
<P added="null"><FONT face=Arial><U>Health warning:</U> 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.</FONT></P>
<DIV><FONT face=Arial></FONT> </DIV>
<P added="null">Alex</P>
<P added="null"> </P>
<P added="null"> </P></FONT></DIV>
<DIV><FONT face=Arial></FONT> </DIV>
<DIV>----- Original Message ----- </DIV>
<BLOCKQUOTE
style="BORDER-LEFT: #000000 2px solid; PADDING-LEFT: 5px; PADDING-RIGHT: 0px; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px">
<DIV
style="FONT: 10pt arial; BACKGROUND: #e4e4e4; font-color: black"><B>From:</B>
<A title=eddie.winship@virgin.net href="mailto:eddie.winship@virgin.net">Eddie
Winship</A> </DIV>
<DIV style="FONT: 10pt arial"><B>To:</B> <A title=transplanfm@hotmail.com
href="mailto:transplanfm@hotmail.com">Ian Hickling</A> ; <A
title=office@ccr-fm.co.uk
href="mailto:office@ccr-fm.co.uk">office@ccr-fm.co.uk</A> ; <A
title=info@a-bc.co.uk href="mailto:info@a-bc.co.uk">Glyn Gloss</A> ; <A
title=cma-l@commedia.org.uk href="mailto:cma-l@commedia.org.uk">cma-l</A>
</DIV>
<DIV style="FONT: 10pt arial"><B>Cc:</B> <A title=johnstannard1946@yahoo.co.uk
href="mailto:johnstannard1946@yahoo.co.uk">johnstannard1946@yahoo.co.uk</A>
</DIV>
<DIV style="FONT: 10pt arial"><B>Sent:</B> Sunday, February 06, 2011 9:44
AM</DIV>
<DIV style="FONT: 10pt arial"><B>Subject:</B> Re: [cma-l] Charitable
Status</DIV>
<DIV><BR></DIV>
<DIV dir=ltr>
<DIV style="FONT-FAMILY: 'Calibri'; COLOR: #000000; FONT-SIZE: 12pt">
<DIV>Hi All</DIV>
<DIV>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!</DIV>
<DIV><FONT size=2 face=Arial></FONT> </DIV>
<DIV>We are going to seek advice on this but I’d be very interested to learn
if anyone else has come across this one?</DIV>
<DIV> </DIV>
<DIV>Frankly, the VAT we might have to pay back is more than the pitiful
amount we have in reserve!</DIV>
<DIV> </DIV>
<DIV>Eddie</DIV>
<DIV> </DIV>
<DIV style="FONT-FAMILY: 'Calibri'; COLOR: #000000; FONT-SIZE: 12pt">Eddie
Winship<BR>Chair, Reading Community Radio. Reg Charity No. 1119557</DIV>
<DIV style="FONT-FAMILY: 'Calibri'; COLOR: #000000; FONT-SIZE: 12pt">Streaming
as Reading4u on <A href="http://www.reading4u.co.uk">www.reading4u.co.uk</A>
<BR>Walford Hall, Carey Street, Reading RG1 7JS<BR>Tel: 0118 327
9774</DIV></DIV></DIV></BLOCKQUOTE></BODY></HTML>