2024 VAT considerations for social purpose and non profits

To kick start the year our team of specialists have highlighted some of the key areas and questions for you and your organisation to avoid common VAT errors.

Do we have any non-business activities?

Following HMRC’s updated approach to non-business activity in June 2022, the issue of what constitutes non-business activity remains a complex area for the sector, and continues to crop up in the courts. However, the cases have provided us with some key insights:

• The Towards Zero Foundation successfully argued that its activities were business in nature as the First-tier Tribunal deemed that the foundation’s free activities were a necessary precursor to making taxable supplies. It was also deemed that the combined costs incurred by the foundation were an “integral part” of its onward taxable business supply. This verdict set a precedent for other charitable organisations, who are trying to ascertain whether an activity is business or non-business.
• More recently for Paradise Wildlife Park, the First-tier Tribunal applied the principles outlined in the Wakefield College case to determine that zero rating on building work was not permissible. Although the park is a charity, it was operating by way of business and so receiving VAT relief as a relevant charitable purpose building was not possible. 

Our insight Is an organisational activity Business or Non-Business? | Crowe UK explains the updated approach to non-business activity, and why it is important.

Do we have a fair and reasonable VAT recovery method?  

COVID-19 changed not only working patterns but trading activities for many social purpose and non profits. As a result of this, organisations should consider whether their VAT recovery method resulted in a fair and reasonable recovery during this period. 

Considering the time limits for VAT corrections, organisations have two years to consider whether they should adopt a COVID-19 partial exemption special method (PESM) for the years the organisation was affected by COVID-19. These principles would also apply to business/ non-business apportionment. 

More information on partial exemption and COVID-19 methods can be found in our ‘Partial exemption for charities’ webinar.

The reverse charge

The reverse charge is a mechanism which places the responsibility for accounting sales VAT from the supplier to the customer. Social purpose and non profit organisations are often restricted in the VAT that they can recover, so the reverse charge can be a cost to the organisation. 

A particular area where we see this applied is services received from Facebook, which is based outside of the UK. HMRC has confirmed its position on advertising through social media platforms (such as LinkedIn, Facebook and Instagram) as being subject to VAT as marketing services, rather than zero rated advertising. We are yet to see HMRC’s interpretation of this be challenged in court. 

It can sometimes be difficult to determine whether the reverse charge applies, as the obligation falls on the party who consumes the supply, which may be different to the party that pays for the service. We often see instances where a UK charity may be acting as a ‘paymaster’ and then the service is consumed by an overseas subsidiary. 

Further information on the reverse charge and how it may impact your organisation is available via our webinar or our insight.

Supplies of education by charities

This was a hot topic in the press last year, as a potential change in government is likely to bring a change in the VAT treatment of education by independent schools.  

Whilst it seems unlikely that the charitable status would be removed from independent schools, The Labour Party could remove the current exemption for education applying to independent schools if there is a change in government.

As a result of this possibility, charities that provide education should ensure they continue to monitor the situation, as this could potentially impact other social purpose and non profit entities.

Our insight VAT on school fees update includes actions that independent schools could take to minimise the potential financial impact, from a VAT perspective.

VAT recovery for funded pension schemes

If you have a pension scheme, your organisation should consider whether it is entitled to recover input tax on the management costs. The rules behind VAT recovery in funded pension schemes are complex, so organisations must follow the correct procedures to avoid losing out on VAT recovery.

HMRC consider the administration and management of pension schemes to be part of the employer’s normal business activity. Therefore, if the employer has a valid VAT invoice, it is possible for the VAT incurred on the management of the pension fund to be recovered by the employer (subject to the usual method of recovery for general overhead costs).

Social purpose and non profit organisations can find more information relating to VAT funded pension schemes | Crowe UK here.

Making buildings safer and greener

Following the government’s decision to lower the VAT rate on installing certain energy-saving materials to zero, there was a consultation this year focused on expanding the scope of the relief. In the Autumn Statement, it was announced that these would be expanded from February 2024 to include more items, and they would apply to works to community centres, places of worship, scout huts, as well as residential buildings and certain charitable purpose buildings.

However, it remains a challenge to obtain these reliefs in practice, especially where other works are being undertaken or where it applies to vital cladding remediation. With social purpose and non profit organisations under pressure to make various safety improvements and reduce their carbon emissions, obtaining tax reliefs for these works will be vital.

If you’d like more information on tax reliefs for electric vehicle charging points you can read our insight here. Alternatively, you can view our recent webinar on VAT and capital allowances reliefs for safer and greener buildings here.

What is considered a fundraising event from a VAT perspective?

In 2023, what constitutes a fundraising event for VAT purposes was considered in the Yorkshire Agricultural Society case, whereby the First-tier Tribunal ruled that conditions for exemption were met. 

In this case, HMRC did not believe the primary purpose of the event was to raise money, as the event had not been promoted as such. Interestingly, the First-tier Tribunal disagreed with HMRC and considered the fundraising exemption to be in line with the intention of the EU directive, which led it to rule that the exemption conditions had been met. 

This highlights the importance of organisations who host fundraising events retaining evidence, to demonstrate the purpose of the event is to raise funds, if they plan to apply for this exemption.

What does the new VAT penalty regime mean for social purpose and non profit organisations?

HMRC’s new penalty regime has been in operation for over a year now. The introduction of the regime saw all organisations begin with a ‘clean slate’ in respect of VAT penalties from 1 January 2023. 

In new regime, those that submit quarterly VAT returns must receive four penalty points before a final penalty is imposed. Therefore, those who have consistently been late in in submitting VAT returns and/or paying outstanding VAT, could begin to see the £250 penalty from HMRC.

If you want to find out more about the new penalty regime, the key points and what this may mean for your organisation you can read our insight on the matter here. 

Making Tax Digital penalties 

Eighteen months ago, HMRC introduced penalties for non-compliance with Making Tax Digital (MTD), however we are yet to see this be imposed by HMRC. 

With most accounting software providers unable to account for business/non-business apportionments and partial exemption, organisations must complete elements of the VAT return outside of the system. This can lead to additional risks in the VAT return process as organisations must ensure they remain compliant with MTD.

If you are unsure about how the MTD requirements affect your organisation, or what you need to do to ensure you are compliant and require further information please see our article here.

How we can help?

Our VAT team has extensive knowledge of HMRC and works with a wide range of social purpose and non profit organisations.

For further information, or to discuss how any of the key points highlighted in this insight may apply to your organisation, please contact our VAT team or your usual Crowe contact.