HMRC back down on VAT will still hurt charities
Howard Lake | 11 August 2005 | News
11 August 2005: PKF (UK) LLP, accountants and business advisers, welcomes the move by H M Revenue and Customs (HMRC) to allow not-for-profit organisations to recover VAT paid on property and construction costs, but says the April 2003 cut off point for back payments means many charities who paid VAT before then will miss out on a valuable cash flow injection.
Previously charities had to allocate VAT on to property and construction costs at the outset. This tied up a significant amount of cash for charities. HMRC was forced to change these rules following the European Court of Justice’s (ECJ) decision in a Dutch VAT case (P Charles, TS Charles-Tijmens), where it was decided that VAT on an item used for both business and non-business purposes can be recovered in full immediately and then paid back over its life, if and when it is not used for business.*
After initially trying to stop these rules being introduced**, HMRC said it would only accept refund claims for VAT incurred since April 2003. Charities now have until February 2006 to make a refund claim. A proportion of the VAT will then need to be paid back by the charity when future non-business use occurs. PKF is calling for HMRC to accept refund claims from before April 2003 to ensure more charities can benefit.
Irit Herzenshtein, partner specialising in VAT at PKF, said: “It is heartening that HMRC has finally accepted the ECJ’s view on recovering VAT, but the sting in the tail is that it will not allow refund claims for periods before 9 April 2003. Its justification – that charities could have chosen to use this process before that time – ignores the fact that few charities will have been aware of this option and fewer still will have used it as it was against Customs’ ./guidance at that time! Once again this shows that when it comes to VAT, charities must stand up for their rights and can expect no favours from HMRC.”
“Many charities incur significant VAT costs related to property and any that have undertaken projects in the last few years should review their position now to see if a refund claim could make a healthy difference to their cashflow.”
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* This principle is usually referred to as the Lennartz mechanism and was named after a previous case.
In the Dutch case P Charles, TS Charles-Tijmens Mr & Mrs Charles disputed the VAT they had paid in respect of their holiday home, which they intended to let out (business use) as well as use it for personal use. Mr & Mrs Charles received a large VAT repayment and will now pay VAT only when they use their holiday cottage themselves.
** HMRC tried to stop these rules being introduced in May 2003 and brought in legislation to prevent such rules being used for UK property and construction costs on projects started after 9 April 2003. This move was, however, found to be a breach of European Union law.
Further information:
Imelda Michalczyk, PR Manager Tel: 0207 065 0141
Frances Dukeson, PR Executive Tel: 0207 065 0376
Notes to Editors:
1. PKF (UK) LLP is one of the UK’s leading firms of accountants and business advisers and specialises in advising the management of developing private and public businesses. The firm has more than 1,500 partners and staff operating in 23 offices around the country. Principal services include assurance and advisory; consultancy; corporate finance; corporate recovery and insolvency; forensic; and taxation. The firm has particular expertise in advising sectors such as small and medium-sized companies; charities; hotels and leisure; medical; professional partnerships; public sector; property and construction; and technology. The firm’s web site is www.pkf.co.uk.
2. PKF (UK) LLP also offers financial services through its FSA authorised company, PKF Financial Planning Limited.
Frances Dukeson
PR Executive
PKF (UK) LLP
Accountants & business advisers
Farringdon Place, 20 Farringdon Road, London EC1M 3AP
Tel 020 7065 0376
Fax 020 7065 0190
Email fr*************@uk.com
PKF (UK) LLP is a limited liability partnership registered in England and Wales with registered number OC310487. A list of members names is open to inspection at Farringdon Place, 20 Farringdon Road, London EC1M 3AP, the principal place of business and registered office. PKF (UK) LLP is authorised and regulated by the Financial Services Authority for investment business activities. Web site http://www.pkf.co.uk.
PKF Financial Planning Limited is incorporated in England registered number 2158849 registered office Farringdon Place, 20 Farringdon Road, London EC1M 3AP. PKF Financial Planning Limited is authorised and regulated by the Financial Services Authority.
The PKF International Association is an association of legally independent firms.
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About Howard Lake
Howard Lake is consultant editor of UK Fundraising. He founded the site in 1994 and successfully sold it in 2022. As director of Giving X Ltd he is exploring growing giving on a massive scale.
He is the founder of Fundraising Camp and co-founder of GoodJobs.