Key VAT topics for social purpose and non profit organisations in 2023

Here is a summary of some of the main VAT changes and issues affecting the sector.

Are activities business or non-business?

HMRC released updated guidance notifying that it is changing its approach to determining whether or not activities are undertaken by way of business. Of course, this is a fundamental principle in relation to the application of VAT on income as well as whether zero or reduced VAT relief will be applicable on costs.

Our insight Is an organisational activity Business or Non-Business? explains the changes and why it is important.

Is your partial exemption method fair?

We have seen many more queries in relation to the apportionment methods used operated within the sector. HMRC are now as a matter of course, asking for standard method override calculations to ensure that the method being operated is fair. It is good practice to review any methodologies applied, especially when operational activities change. This can often result in a new method being required. Our recent insight Standard Method Override provides further information.

It is also important to note that it is still possible to seek approval for an alternative method to be applied, for periods where VAT recovery was unfairly affected by the COVID outbreak and subsequent lock down periods. Sign up for our on demand webinar Partial Exemption for charities to find out more.

Saving VAT costs on building projects

Building projects attract significant costs. As the zero and reduced rates of VAT applicable to building works are complex and often require certification by the charity, this is an important area to get right. There has been recent litigation, as well as updates to HMRC guidance, in relation to the VAT treatment on the construction costs of community centres/village halls that can be accessed, read more Should VAT on community centres be zero-rated? We also have covered this subject more generally in a bite-sized webinar Charities: Saving VAT on building projects.

Where VAT is incurred on a capitalised building project over £250,000, it is important to note that VAT recovery is determined over 10 years from first use following the ‘Capital Goods Scheme’ rules. This is also a common theme for enquiries from HMRC so it is important that adjustment calculations are undertaken annually.

Sales of goods and electronic services to customers abroad.

Selling goods and electronic services (such as pre-recorded courses, e-books and webinars) to individuals outside of the UK carries the threat of VAT falling due in the country where the service is downloaded. As well as the VAT cost this will often incur additional administration costs. Therefore, it is important to consider the implications of making these supplies in advance of completing any transactions, as there are alternative approaches to consider and some simplifications. More detailed information is available on Digital training and events - Getting the VAT right.

Will education remain exempt for charities?

The VAT exemption that covers the education provided by independent schools has become newsworthy, and it appears that a change in government may result in the removal of this exemption. Charities that provide education and training may also be affected by the change depending on if and how any change is implemented in the ultimate legislation.

VAT on employment agency costs

During 2022 we saw a number of our clients being issued with ‘VAT only’ invoices from agencies that have incorrectly not applied VAT to their previous supplies. This can often result in a VAT cost that cannot be fully recovered. View VAT on temporary care staff for further information including strategies to mitigate these unwanted costs.

Does VAT exemption apply to supplies of accommodation and room hire?

There have been various VAT cases over recent years which appear to be narrowing the application of the exemption, that covers the letting of land and buildings. HMRC have in many instances argued that the predominant supply is of taxable facilities rather than exempt land/buildings in situations where more is provided to the user than a bare room. Care must be taken in this area, where other services are offered with the room hire. Please click here for more information.

Application of VAT to COVID testing

We understand that HMRC’s published guidance in relation to COVID-19 testing services may be changed to allow exemptions to apply in more instances than first envisaged. We have looked in more detail at the issues, VAT and COVID-19 testing services, if VAT has been applied to testing services you have received this may be incorrect and it may be possible to get this VAT refunded.

Reverse charges

The general rule for cross border services means that VAT falls due on most services that are acquired from outside of the UK. This is the main reason that many charities are registered for VAT since the expenditure counts as income for the purposes of the limit for compulsory VAT registration (which remains £85,000 on a rolling twelve-month basis).

We have been made aware that the sector may be mounting a legal challenge, in relation to the application of reverse charge VAT on ‘smart advertising services’ provided by suppliers like Facebook. This is on the basis that this could be subject to zero-rating under the banner of charity advertising. Register for our on demand webinar Bitesize VAT for non profits for more information on the technical detail on reverse charge.

New Penalty Regime

2023 brings a new penalty system to cover late payments and submissions of VAT returns. These rules will replace the existing default surcharge system and with the guidance currently available it appears that the new points based system will provide a fairer deterrent to all taxpayers – read more in our detailed insight HMRC introduce new VAT penalty and interest rules in 2023.