Charities recover VAT on costs incurred on their activities undertaken within a tax year. The COVID-19 pandemic has directly limited some of the activities that can be undertaken by charities. Consequently, the VAT recovery permitted for the year end 2020/21 could look very different to a charity’s usual VAT recovery position, with the potential for substantial amounts of VAT having to be paid back to HMRC. This article looks at the issue and some possible solutions.
Charities are often involved in ‘non-business’ and VAT exempt activities and therefore cannot recover all of the VAT incurred on costs. In these instances, apportionment calculations are undertaken to recover a fair amount of the VAT on overheads depending on the activities undertaken. 2020 may have led to activities being very different from those undertaken in a ‘normal’ year and so this may in turn lead to a substantially different recovery position. Unfortunately, the effect will often be negative (less VAT recovery). Typically it has been the taxable activities which afford VAT recovery, such as the running of charity shops, /cafes, and the letting of conference space which will have reduced whilst other supplies such as the exempt services have remained consistent or in many cases there has even been an increase in the provision of free ‘non business’ activities as charity’s have responded to this crisis
Where the activities of a charity have changed during the year it might be that the change in recovery reflects the level of different activities completed by the charity in this tax year and in these cases there will be no further action required. However, where there have been no activities undertaken as a result of lockdown, an adverse impact on VAT recovery could be unfair.
HMRC officers are aware of the potential impact on charities but there cannot be a ‘one size fits all’ approach because of the diversity of different charities’ activities. Therefore, currently HMRC is suggesting taxpayers write informing of their circumstances and making proposal to address any inequality in a charity’s VAT recovery.
If you would like to discuss this issue further, please get in touch with your usual Crowe VAT contact or email firstname.lastname@example.org.