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 LewisTax Consultant

Bates Wells & Braithwaite London LLP2 – 6 Cannon StreetLondon EC4M 6YHTel: 020 7551 7777

E-mail: b.lewis@bwbllp.co.uk