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bigduckontax
bigduckontax, Accountant
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This is a charity meets VAT question. As a Scottish charity,

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This is a charity meets VAT question.
As a Scottish charity, we own a company limited by shares which is also a charity in its own right. We are about to embark on a building renovation and refit project. We want to do this through the charitable company, so that it would sign the lease, pay the bills, and so on. Its income may be in part grants from those willing to make them, but a large part of the income, probably the bulk of it, would be donations/grants from the "parent" charity. The question is: could the charitable company (NOT the "parent" charity) register voluntarily for VAT, and thus be able to reclaim VAT paid out on building renovation expenditures? Because the income is not through invoice, the VAT would be reclaimed but not charged, and so the company would be a net receiver of VAT. Is this permissible? Are there any drawbacks or things to consider?
Submitted: 1 year ago.
Category: Tax
Expert:  bigduckontax replied 1 year ago.
Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question. Unfortunately the ability of a builder to zero rate a building for charities is restricted to the construction of new premises; refurbishment does not qualify. Thus the registration route you propose is feasible. However, there is the danger that the charities income would still be subject to VAT. The fact that the charity does not invoice for its income does not mean that it is not liable to VAT if the turnover threshold, currently 82K is breached in any one year. The following activities are outside the scope of VAT [source: Gov UK web site]: 'Outside the scope of VATIncome from non-business activities is ‘outside the scope’ of VAT (you can’t charge or reclaim VAT on them). This includes:donations where nothing is given in returngrant funding given to support your charitable activities where nothing is given in returnactivities where your organisation doesn’t make a charge' Your main problem is if your charity makes exempt supplies eg the provision of welfare services. These do not count for the recovery of input tax so if say 50% of the charity's outputs were exempt supplies then only 50% of input tax could be reclaimed. I do hope that I have been able to shed some light on your conundrum.
Customer: replied 1 year ago.
In order I don't misunderstand you, can you please clarify what you mean by "input" tax?If I understand the first part of your answer, donations from the parent charity to the charitable company could be considered as inclusive of VAT if the parent charity received a benefit in return for the donation (for example, the ability to hold meetings and generally operate in the building). This would effectively mean that the worth of a £1000 donation would be 833.33. At the other end, £1000 spent (including VAT) would result in £166.67 being reclaimable, to no net benefit. If the company was NOT registered for VAT, £1000 donation would be worth £1,000 and there would be no difference overall.So, still concerning the first part of your answer, there would be a benefit only if the donations from the parent charity were outside the scope of VAT. Would the use of the building by the parent charity (at no cost) inevitably be deemed to be something in return for the donations to the company?As regards ***** ***** part of your answer, and presuming the meaning of "input" tax, it seems that what you're saying is that ongoing charitable purposes would not qualify for the reclaiming by the company of the VAT deemed to be included in the donations from the parent charity. But the plan would be that the donations to the charitable company would only be for building refit purposes, and the expenditure would only be on refit purposes. The other charitable uses of the building would be by and through the parent charity directly.Does this make a difference?
Expert:  bigduckontax replied 1 year ago.
Input tax is the VAT paid for goods and services by an organization and is reclaimed on a quarterly basis. Donations to a charity where nothing is given in return, as I explained, is outside the scope of VAT. The nub of the problem in reclaiming input tax are activities which are exempt from VAT as opposed to being outside scope. I would point out that letting premises is an exempt supply so there is a danger of running into this problem very quickly. For the proportion of a charity's outputs which are exempt then that proportion of overall input tax cannot be reclaimed.
Customer: replied 1 year ago.
OK. But is it not the case that expenditures which are exempt from VAT have not had VAT charged on them, and so the fact the no VAT can be reclaimed is not a problem?Unless I'm totally misunderstanding it, it seems to me that the remaining question is the one I asked on the first part of your previous answer, namely: Would donations from the parent charity to the company be outside the scope of VAT, or would the fact that the parent charity has the use of the building inevitably be considered "something in return", so that VAT was deemed to be included in the donations from the parent charity?In an ideal world, the company would be able to reclaim the VAT actually charged on expenditures, obviously not reclaim VAT on exempt services where none had been paid, and thereby recoup the VAT actually paid with no penalty or consequence on the income side. But if it were as simple as that, why wouldn't we all register voluntarily? If donations from the parent charity are indeed outside the scope of VAT, is my "ideal world" not the situation we are in??
Expert:  bigduckontax replied 1 year ago.
You have indicated to me that they are, in principle, for the use of the premises. In that case they are an exempt supply which can limit the proportion of input tax reclaimable. They are not a donation where nothing is given in return. There are basically three types of outputs. Those outside the scope of VAT, Exempt supplies and the three rated supplies rolled together, the standard, reduced and zero rated ones. If the aggregated turnover of the latter exceeds or approaches 82K in any one year then the organization must be registered for VAT. Many organisations which do make predominantly zero rated supplies often do register even if their turnover is tiny. Registration for VAT involves detained book keeping for the tax which many persons find laborious. I have been accounting for VAT since its introduction in the early 70s so it is second nature. Also HMRC will query a registration if the turnover is low except where zero rated supplies are involved.
Customer: replied 1 year ago.
I think I see what you're saying. When you spoke about "letting premises" being "an exempt supply" you had in mind the company letting to the parent charity. (I filtered this through my knowledge that the building will itself be leased by the company from a (very co-operative) landlord not previously mentioned.)The fact is that the parent charity would have the use of the building whether or not it made any donations to the company. It could be argued therefore that the use of the building is not a benefit from the donations made by the parent charity to the company, but is independent of these donations. Would that make a difference? Or would that argument be considered untenable?
Expert:  bigduckontax replied 1 year ago.
Well it could, but HMRC would tend to view that arrangement, not unreasonably, as tax avoidance in the sense that more input tax could be reclaimed. Transactions in land are exempt from VAT, but can be charged as standard if the owner so elects. The problem here is that if VAT is levied on rents then on sale it has to go on the selling price too which may deter prospective buyers not registered for the tax. As a general rule only the largest organisations elect to apply VAT to rentals.
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Expert:  bigduckontax replied 1 year ago.
Thank you for your support.