Charity Tax Brass Tacks October 2015

Charity Tax Brass Tacks

If you need to keep abreast of the key practical issues relating to charity tax, this practical, no-nonsense newsletter is for you.

Gift aid declaration

HMRC has just published its revised gift aid declaration wording which supersedes the version which has applied for a number of years. The idea behind the revision was to shorten the message and make it clearer in its impact. The declaration completely removes pointless references to VAT and Council Tax. However, it includes a much stronger message concerning the need for the donor to pay sufficient income tax or capital gains tax in order to match all of the gift aid claims of the charities.

A message to the effect that enough tax must be payable by the donor has always been required on the gift aid declaration, but this has now been supplemented by a direct message to the donor that he is liable to pay any shortfall of tax between what he pays and what the charity claims. This legal obligation has always been present, but most people have been unaware of it including many tax inspectors and charities. This has arguably led to a somewhat casual view of the position by donors, some of whom appear willing to sign gift aid declaration forms whether or not they will pay enough tax. The form, however, still does not say to whom the donor is liable for the tax. The answer is that he is liable to HMRC, and not to the charity.

The new wording is available at this link:

We are told that the words will become compulsory with effect from 6 April 2016. Up until then the old wording can be used. Any gift aid declarations signed before 6 April 2016 with the old words will continue to have force. However, this will not change the underlying legal position, that the donor is liable for any shortfall.

Charities will want to consider how they position this change. On the one hand they could use it as an opportunity to draw specific attention to the issue in order to save donors from the potential embarrassment of having to pay tax (which they have not earned) to HMRC. On the other hand they may decide that this will have a negative impact on donor morale, and cause even those donors who pay enough tax to be concerned about the ramifications and to refuse to sign a gift aid declaration.

This is particularly difficult when dealing with ‘enduring gift aid declarations’. These are declarations which cover future donations as well as current and past ones. People cannot be sure whether they will pay enough tax in the future. But they are supposed to write to the charity to cancel any declaration which is no longer valid owing to their failure to pay sufficient tax. The difficulty is that most people do not recall the gift aid declarations they have signed. In particular, if they have no reason to claim tax on their own tax return (only relevant to people who pay above the basic rate) it is likely they have no record or recollection of the declarations they have signed. This is a significant potential burden on donors which may cause them to fret about any involvement in gift aid.

VAT victory at European Court

The case of Sveda UAB could well go down in history as one of the most important with regard to the ability to reclaim VAT on expenditure.

The curious thing about this case, which related to a commercial company, was that it involved their spending money on something that was provided free of charge to the public. In their case this was a decorative woodland pathway which led to their shop. The other interesting fact was that 90% of the cost was covered by government grant. The net result was that many potential customers used the decorative pathway without bothering to enter the shop. However, the intention was that certain of those who took this delightful walk would be tempted to buy something at the end of it.

The UK government supported the stance of the national government involved (Lithuania) in saying that no VAT should be reclaimed because the facility was for free of charge use, and not connected with the making of taxable supplies. Alternatively, it said that only 10% of the VAT should be reclaimed, since the company only met 10% of the cost.

The Court of Justice rejected both of these arguments. Whilst the path could be used free of charge, the purpose from the company’s standpoint was to generate more traffic towards its shop, and thus generate more taxable sales. This meant that although the cost had a link with the provision of a free facility, it also had a link with the making of taxable supplies. There were no exempt supplies involved, and this was thus sufficient for full VAT recovery. There was no suggestion that the company could only reclaim the percentage of the cost it met, and this supports our general view that grant funding does not, in itself, mean that VAT cannot be claimed (although in certain cases, where an activity is fully grant funded, that would be the result).

What does this mean for charities?

We have to interpret this with caution, since the case concerns a commercial company. Charities usually have purposes that go beyond creating taxable transactions, whereas a commercial company will exist only to sell goods and services. But, in theory charities ought not to be treated fundamentally differently just because they have a duality of purpose. For this reason the case may very well be helpful in creating circumstances where a charity can reclaim VAT where the costs are used for purposes which involve making taxable supplies and involve the free provision of services. However, the case does not tell us how far this principle could be taken. We have to be wary of assuming that it will work where a fundamentally free facility is provided by a charity, in circumstances where a certain amount of taxable spin-off activity arises. This may put disproportionate emphasis on the minor taxable supplies, thus bypassing the fundamental non-business purpose in the costs. But that does not mean that a case which involves a more even-handed mix of taxable and non-business activities would fail to meet this particular test. We have yet to test the boundaries of this new principle, and it will be interesting to see how this develops in the future.