KEY POINTS ARISING FROM A MEETING BETWEEN NORTH EAST VCS ORGANISATIONS
AND NIGEL CLOTHIER/BEDE MURRAY FROM HMRC
KEY POINTS
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The information below is an interpretation of the discussion with HMRC and covers the
general principles. If in doubt, check with HMRC!
There are a number of documents that may be useful for VCS organisations to consider
when deciding whether activity may be VAT liable. These include:
o The 1994 VAT Act (particularly Schedule 9 which lists Exempted Goods and
Services);
o The online Manuals for “Business/Non-Business” and for “Supply and
Consideration”. These can be found on Gov.uk at
http://www.gov.uk/government/organisations/hm-revenuecustoms/collections/vat-manuals (NB. Not yet working until HMRC website
transfers to Gov.uk)
o The Gov.uk link to VAT manuals also includes a link to the manual on Charities,
which provides some guidance on determining charitable status, charities and
their activities.
There is a helpline for charities – 0300 123 1073. There are also dedicated teams in
London and Manchester that are able to consider specific issues of VAT regarding VCS
organisations.
There appear to be two key consideration steps for a VCS organisations (see below for
further detail):
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Is the activity which is being undertaken VAT liable (i.e. is it being funded in
return for delivering specific targets/a specific service and payment is dependent
on those targets/service being delivered)?
If the answer to this first question is yes, are the goods and services exempt from
VAT?
The move of commissioners towards formal contracts, especially Payment by Results,
rather than grants can potentially leave organisations that were not previously liable for
VAT to be involved in VAT liable activity.
VCS organisations need to be aware that, in some instances, Payment by Results, could
mean that VAT becomes payable before payment for an activity is made by the
commissioner.
In VAT terms, consortia have no legal standing. They are treated as if they were
partnerships. The ‘partnership’ is regarded as a separate entity from its component
members, so if for example a partner, or the lead partner, supplies services to the
consortium, and those services are standard rated, the lead partner (if VAT registered)
would have to account for output tax on them. Unless the consortium is also VAT
registered, and the services received support the making of a taxable supply (even at a
zero or reduced rate) then the VAT incurred by the consortium will be irrecoverable.
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As partnership working/consortia working is encouraged by commissioners, individual
partners each remain responsible for their own VAT – for example, the lead partner may
be liable for the services that it provides to the other partners in terms of management,
monitoring etc. (see below for further detail)
HMRC acknowledges that many VCS organisations may be reluctant to contact them for
fear of getting the “wrong answer” about VAT, but has stressed that they are not keen on
slapping penalties on VCS organisations who are working in the public interest and will
do what they can to assist. They recommend that, before using tax experts (VCS
experience indicated that this could be costly, you rarely get pro bono for something like
this because of liability, and the advice is often inconclusive). HMRC suggests
contacting the helpline, which can be done anonymously.
HMRC has suggested that it may be a useful message to get out to all VCS
organisations to include an instruction to their auditors to consider “the tax liabilities of
our activities”
CHARITIES
 From a VAT perspective, there is no definition of a charity and for VAT purposes a VCS
organisation does not require registration with the Charity Commission
DONATIONS
 The extent to which income from donations may be liable to VAT depends on whether
there is an obligation on behalf of an individual to donate. The example used in
discussion was entrance to a museum:
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If a museum places a box at the entrance asking for donations, but making a
donation is not dependent on being able to get into the museum, there is no
obligation;
If someone stops you at the entrance and explains that the museum depends on
donations to fund its running costs, despite the fact that an individual may feel
more pressure to donate, they still have the free will to say no and enter for free.
So again, there is no obligation.
If someone is asked to make a donation and in return is only allowed to access
the museum if they do, there is an obligation to donate and income would be
subject to VAT.
VCS organisations need to be careful about whether donations are freely given.
Company sponsorship of an award in return for a table at the awards ceremony may be
regarded as being VAT liable as the company is receiving something in return for its
funding.
EXTENT TO WHICH AN ACTIVITY OF AN ORGANISATION MAY BE VAT LIABLE
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Europe refers to VAT being liable where there is “economic activity”, although there is no
definition of “economic activity”. There is however lots of jurisprudence which has
helped provide a definition.
UK refers to “business” and “non-business”.
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The key test from HMRC’s point of view is whether there is “reciprocal performance”
involved. By this they mean whether the VCS organisation is carrying out activity for
which they will receive payment AND the payment is dependent on delivering specified
outcomes. In this respect, HMRC advises caution in simply regarding funding as either
a grant or contact. Some funding which is termed as being delivered under contract (Big
Lottery was cited) will be paid despite outcomes not being achieved and is regarded as a
grant. So:
o If funding is awarded and the funder does not specify how that funding should be
used or which outcomes should be delivered, there is no reciprocity and no VAT
is liable.
o If a funder indicates that the funding is designed to achieve certain outcomes but
does not specify that payment will be made only on the achievement of those
outcomes, there is again no reciprocity.
o If a funder makes it clear that payment will be made only in turn for certain
activities being carried out or outcomes being delivered, that is a reciprocal
arrangements and, in the first instance VAT is liable.
In this respect, Payment by Results would normally result in VAT being liable (but see
below re exemptions)
EXEMPT GOODS AND SERVICES
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However, the supply of certain goods and services, many of whom are the focus for VCS
organisations are exempt from VAT: These are listed in Schedule 9 to the VAT Act 1994
and include:
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Education;
Fundraising events by Charities and other qualifying bodies;
Health and welfare;
Sport, sports competitions and physical education;
Subscriptions to trade unions, professional and other public interest bodies
So, even if reciprocity is involved, a service may be exempt from VAT.
PARTNERSHIPS AND CONSORTIA
The move by commissioners to encourage consortia/partnership working is raising a number of
questions:
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Organisations who provide services to other VCS organisations (accommodation,
payroll, management etc) will have to charge VAT on those services
There has been some concern about the VAT liability of a lead body who is appointed to
receive funding on behalf of a partnership or consortium. The consortium will be
regarded as a separate entity similar to a partnership by HMRC. If the activity
undertaken by the partnership is VAT liable this may take them over the VAT threshold
and the consortium would have to register separately for VAT. HMRC advises that, when
a lead organisation sorts out the admin, management, monitoring etc, the lead partner
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may be liable for VAT on those services that it provides to the other partners. However,
in terms of funding passed on to other delivery bodies, the VAT liability lies with those
individual partners in terms of the services which each provides.
If a partnership sub-contracts delivery, the VAT liability of the subcontractors will depend
on the “reciprocity” test.
The following is a list of activities and the definition of whether they are “business” or “nonbusiness”.
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Legacies: Non business
Subscriptions: Business
Investment income: Non business
Goods sold in a charity shop: Business
Credit card affinity scheme training payments: Both
Education/training: Business
Freely given donations: Non business
Grant funding: Both, depending on whether there is an element of recipocrity
Fundraising events: Both
Welfare: Both
Sale of advertising space: Business
Admissions to museums and galleries: Both, depending on whether a charge is made
Supply of staff: Both, depending on how the staff are supplied
Property rental: Both