Tax, VAT & Working With Corporates

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Tax, VAT & Working With Corporates
Bill Lewis
14 November 2012
Tax - why does it matter?
 Charity law: charities should not carry out a
non-charitable activity
 Income/corporation tax: Charities run the
risk of paying tax on profits
 Rates: carrying out non-charitable activity
affects entitlement to rates relief
 VAT implications
Five Step Test
 Does the activity amount to trading?
 Does the charity have power to carry out
trading?
 Is it primary purpose trading?
 If not, does the trading fall within any tax
exemptions?
 If not, should it be carried out through a
trading subsidiary?
Tax Exemptions





Primary Purpose Trading
Anciliary Trading
Small Scale Trading
Donations
One off fundraising events
Small Scale Trading Activities
 First £5,000 of Charity’s gross annual trading
income is exempt from VAT, or
 If incoming resources are in excess of
£20,000 then 25% of incoming resources are
exempt from tax up to a maximum
exemption of £50,000
 Income must be applied solely to charity’s
purposes
 Exemption applies to income not otherwise
exempt - e.g. fundraising exemption
Fundraising Events Tax & VAT Exemption
 Event organised and promoted as for
charity fundraising by a charity or its
trading company
 No more than 15 events of the same type
in the same location, ignoring events
where gross income is £1,000 or less
 Events can have no more than 2 nights
accommodation
Exemption covers
 Admission charge, brochures, sales of
advertising space, other items sold at the
event, sponsorship, raffles
 NB IF THE CORPORATE ORGANISES
THE EVENT THE EXEMPTION DOES
NOT APPLY
Trading Company?
 If not primary purpose trading, and
 No tax exemption
 Then consider routing income through
trading subsidiary
 Driver for using a trading company is
usually corporation tax saving rather than
VAT saving
Advantages of Trading Company
 Avoids charity incurring a corporation tax
charge
 Ring fences other risks into a separate
organisation
 May enhance VAT recovery - I.e. VAT on
costs may be recovered when they could
not be recovered when run through the
charity
How is corporation tax saved?
 Charity owned trading subsidiaries are liable
to corporation tax just like any other
company
 But if they gift aid profits to the parent charity
the gift is tax deductible
 Downside is that if tax is to be avoided
completely no money profits can be left in
the trading subsidiary for investment.
 Therefore consider charity to trading co.
loans
Tax, VAT & Corporate Sponsors
 Pure donations are outside the scope
of VAT and not subject to tax in the
hands of the charity – but how often is
a payment from a corporate supporter
a pure donation?
Tax, VAT & Corporate Sponsors
For example corporate might want:
 Website links
 Display of logo and Corporate Colours
 Descriptions/endorsements of its products
and services
 Use of charity’s mailing list
 Right to sell goods on the charity’s
premises/website
Tax, VAT & Corporate Sponsors
Other examples of what a corporate might
want:
 Volunteering experiences for staff
 Staff training
Can you think of other examples?
Tax, VAT & Corporate Sponsors
Providing such benefits to corporate
supporters in return for their support will
mean that their donations are treated as
fees subject to tax and VAT.
What to do?
 Split payment between donation to charity
and fee subject to VAT to trading company.
Fee is commercial value of sponsorship.
 Or fee of 10% of sponsorship is usually
safe if no known commercial value.
 Smaller fee if sponsorship huge but benefit
to sponsor small.
 Bigger fee if benefits huge
Know Your Corporate
 Bear in mind that most corporate
supporters can recover any VAT you
charge them, but those whose services are
VAT exempt cannot – in particular banks
and insurers. Charging VAT hurts them
 On a practical level many CSR employees
of big companies see VAT as an extra cost
when in most cases the company can
recover it. Have them talk to their Finance
people.
Examples to discuss
 Soft drink company’s support of a childrens
charity in return for various benefits.
 Name and logo of corporate appearing in
annual report of charity and nothing else
 Website links between charity and
corporate and nothing else
How can I have my cake and eat it?
Alternative solution. Corporate makes a
pure and unconditional donation to the
charity, which without any obligation to do
so gives publicity etc to the corporate.
Nothing in the grant agreement or
correspondence or emails between charity
and corporate indicates that publicity must
be given. Payment remains a tax and VAT
free donation. BE VERY CAREFUL WITH
THIS ROUTE.
Bill Lewis
Tax Consultant
Bates Wells & Braithwaite London LLP
2 – 6 Cannon Street
London EC4M 6YH
Tel: 020 7551 7777
E-mail: [email protected]
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