Charity VAT: Are some small charities overclaiming?

James Hurst explores HMRC’s recent communication to smaller charities regarding VAT claims. Are some organisations inadvertently claiming too much?

With real-life case studies and tribunal cases, James will break down these issues at the upcoming Mercia Charities Conference. Book your place today

For more information on this topic and more, please visit www.mercia-group.com for further details.

Transcript

Hello, this is James Hurst at Mercia. Recently, as I was gathering my thoughts and preparing for my VAT session at the forthcoming Mercia Charities Conference, which is going to be on the 6th of March, and also the Scottish Charities Conference on the 11th of March. The first thing that. Always comes to mind on these occasions. 

When you're looking at VAT and charities is that with VAT and it is in particular the problem of Irre Recoverable. VAT continues to represent, I think, the biggest single VAT challenge to charities. And the second thought is always that, whereas for many businesses, VAT can often be. relatively straightforward. 

And I emphasize the word relatively there. VAT for charities is seldom in my experience, other than relatively complex. And that's especially the case with smaller charities. I think the amount of time and effort getting to grips with VAT issues can often be. be disproportionate to the amount of tax at stake. 

But then given the finely balanced nature of the finances of many charities, particularly the smaller ones, the risks of getting a VAT wrong can be very serious with a significant adverse impact. Now, occasionally charities get their VAT wrong and find that there, there's actually a benefit or an upside because they've been getting it wrong in favor of HMRC for years. 

But unfortunately, it's usually the other way around. And there's usually money to pay to HMRC when people get it wrong. I was fortunate in my, you know, practice to be involved with the charity tax group for a number of years and the CTG did some analysis in 2020 suggesting that the annual aggregate cost of irrecoverable VAT for charities was 1. 

8 billion. So that's probably now well over two billion pounds a year, I imagine. But when you look beyond the sort of headline figures, I know from experience it might only need an unexpected VAT cost of maybe a few thousand pounds for a small charity to be enough to jeopardize its activity. So context is important. 

And in this regard, what I find interesting is that HMRC have recently sent out nudge letters To smaller charities, I say nudge letters. Actually, they're they've been sent out by email, strictly speaking, but these letters reflect a concern at HMRC that, in their words, a high number of smaller charities are unaware that they have non business activities. 

And therefore are required to apportion their input tax. So it's a basic principle of VAT that you can't recover VAT as input tax. If that VAT relates to the costs of undertaking non business activities. So HMRC are concerned here that they think that. Charities, particularly smaller charities are recovering all of their VAT and not restricting the VAT that relates to the undertaking of non business activities. 

So what is a non business activity by a charity? Well, here you're plunging straight into an area of complexity. And HMRC's recent letter, what I'll be aiming to do at our forthcoming Mercia Charities Conferences is to run through this topic and Outlining the differences between business activities and non business activities for charities by highlighting some key previous cases, which help explain the topic and help us understand how we've arrived at the current thinking and how that's evolved. 

And then also look at a couple of recent tribunal cases, plus some real life case studies that are drawn from my time in practice working with clients and in in the charity sector. to then illustrate some of the practical challenges and how these are best addressed. And then that's about sort of avoiding falling foul of HMRC. 

In addition at the conference, it won't all be about business and non business. I'll also look at a couple of other recent charity VAT tribunal cases on points of interest. So in conclusion, this is James Hurst at Mercia with a reminder that we have our Charities Conference on the 6th of March and our Scottish Charities Conference on the 11th of March. 

They're not just about VAT. There will be a range of speakers on a variety of interesting topics. I do hope you'll be able to join us.