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Opportunity for charities to recoup millions of pounds in VAT

Howard Lake | 16 October 2005 | News

A recent case involving the Children’s Society means VAT-registered charities have an opportunity to scoop millions of pounds from backdated VAT payments, according to VAT specialist Simon Newark of top twenty accountancy group UHY Hacker Young.

Activities
The extent to which a charity might benefit depends on which of its ‘activities’ are classed as ‘business’ activities and which as ‘non-business’ activities.

Business
Most charitable organisations have a mix of ‘business’ activities, some of which are taxable and others of which are exempt for VAT purposes. This means that the organisation can only reclaim part of the VAT it incurs on expenditure. The exact amount depends on the types of activities.

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A charity could recover anything from a single figure percentage to 100% (fully taxable). However, before making this ‘partially exempt’ calculation, the charity must strip-out any VAT on spending associated with ‘non-business’ activities.

Non-Business
VAT spending on ‘non-business’ activities is not recoverable at all and can represent a big cost to the organisation concerned. This would include the administration costs of:

1. Recruiting donors
2. Receiving legacies or making donations and grants
3. Owning shares
4. Receiving dividends and interest payments

However, in a recent High Court case, it was decided that:

1. The receipt of donations and
2. The receipt of other unrestricted funds is NOT an ‘activity’ in itself, just a mechanism which supports the charity’s wider objectives.

As a consequence of this decision, the ‘non-business’ element of a charitable organisation’s activities is now likely to be much smaller as will the associated VAT costs.

Backdated VAT
Charities should re-examine their past VAT returns and submit claims for previously blocked VAT. All charities should take immediate action to recover sums due to them. It is estimated that tens, even hundreds of millions of pounds could be reimbursed.

Opportunity
Charities must determine whether or not they have an opportunity to make a back-claim for past VAT. Those with significant ‘non-business’ activities are likely to gain from this decision, to a greater or lesser extent depending on their ‘partial exemption’ recovery rate.

The only way to quantify the size of the back-claims will be through detailed examination of past calculations.

Some smaller charities may not have registered for VAT voluntarily because the cost of administration would have outweighed the benefits of VAT reclaims. That equation has now changed and they should re-assess their position.

It may even be possible to secure a back-dated VAT registration to maximise the benefit from this High Court decision.
For many charities, this development could be a much needed lifeline.

Simon Newark can be contacted at UHY Hacker Young on 0207 216 4600.

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