Transcript Tax, Gift Aid & VAT - Institute of Fundraising

Tax, VAT & Working With Corporates
Bill Lewis
6 December 2011
Tax - why does it matter?
 Charity law: charities should not carry out a
non-charitable activity
 Income/corporation tax: Charities run the
risk of paying tax on profits
 Rates: carrying out non-charitable activity
affects entitlement to rates relief
 VAT implications
Five Step Test
 Does the activity amount to trading?
 Does the charity have power to carry out
trading?
 Is it primary purpose trading?
 If not, does the trading fall within any tax
exemptions?
 If not, should it be carried out through a
trading subsidiary?
Tax Exemptions
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Primary Purpose Trading
Anciliary Trading
Small Scale Trading
Donations
One off fundraising events
Small Scale Trading Activities
 First £5,000 of Charity’s gross annual trading
income is exempt from VAT, or
 If incoming resources are in excess of
£20,000 then 25% of incoming resources are
exempt from tax up to a maximum
exemption of £50,000
 Income must be applied solely to charity’s
purposes
 Exemption applies to income not otherwise
exempt - e.g. fundraising exemption
Fundraising Events Tax & VAT Exemption
 Event organised and promoted as for
charity fundraising by a charity or its
trading company
 No more than 15 events of the same type
in the same location, ignoring events
where gross income is £1,000 or less
 Events can have no more than 2 nights
accommodation
Exemption covers
 Admission charge, brochures, sales of
advertising space, other items sold at the
event, sponsorship, raffles
 NB IF THE CORPORATE ORGANISES
THE EVENT THE EXEMPTION DOES
NOT APPLY
Trading Company?
 If not primary purpose trading, and
 No tax exemption
 Then consider routing income through
trading subsidiary
 Driver for using a trading company is
usually corporation tax saving rather than
VAT saving
Advantages of Trading Company
 Avoids charity incurring a corporation tax
charge
 Ring fences other risks into a separate
organisation
 May enhance VAT recovery - I.e. VAT on
costs may be recovered when they could
not be recovered when run through the
charity
How is corporation tax saved?
 Charity owned trading subsidiaries are liable
to corporation tax just like any other
company
 But if they gift aid profits to the parent charity
the gift is tax deductible
 Downside is that if tax is to be avoided
completely no money profits can be left in
the trading subsidiary for investment.
 Therefore consider charity to trading co.
loans
Tax, VAT & Corporate Sponsors
 Donations – outside the scope of VAT
 If sponsor simply asks for acknowledgement
– no VAT
 If sponsor requires use of their name & logo
– this is advertising, non charitable activity,
sponsor’s payment subject to tax and VAT
What to do?
 Split payment between donation to charity
and fee to trading company. Fee is
commercial value of sponsorship.
 Or fee of 10% of sponsorship is usually
safe if no known commercial value.
 Smaller fee if sponsorship huge and but
benefit to sponsor small.
What if the sponsor wants more than
publicity for their name and logo?
 May have to consider more of the payment
from the sponsor being a fee subject to
VAT run through the trading company
 Consider on a case by case basis - get
advice.
Summary of Gift Aid Rules
 Charity receives 25p for each £1 donated.
 Donor receives higher rate tax relief
 Corporate donor receives tax relief, but charity
cannot reclaim tax on donation
 Detailed guidance in Charities section of HM
Revenue & Customs website
 www.hmrc.gov.uk
Gift Aid Rules (continued)
 Gift aid not allowed if donor or connected
person receives benefits as a result of the
donation.
 Connected persons are relatives of the donor
and their spouse
 Benefits are:
 Donation up to £100 – 25%
 £101 - £1,000 - £25
 Over £1,000 – 5%
Gift Aid Rules (continued)
 Participants and their families can sponsor
themselves under gift aid to take part in the
London marathon – benefits deemed within the
limits unless travel/accommodation/expensive
presents provided.
 Same rules apply for similar events - e.g. Great
North Run - where in effect the “pain” is
deemed to outweigh the “pleasure”!
Gift Aid Rules (continued)
 Must contain donor’s name, address, charity’s name,
description of the donations covered.
 Also must include a note explaining the donor must pay
tax sufficient to cover the gift aid tax
 HMRC have model declarations on their website
 No requirement for claims to be signed/dated
 An address need only be a house name/number and
post code
 Workplace addresses not acceptable
 Model declarations can be run off the HMRC website
Five Top Tips
1. Corporates always want publicity in return for
payments - split between VATable and taxable
fee for this and tax and VAT free donation
2. Make use of the "one off" fundraising events
exemption
3. Claim gift aid on employee donations whenever
you can
4. The tax reliefs for charities do NOT apply to the
corporate supporters…
5. …But they do get tax relief on the sponsorship
payments and gifts they make to you
Bill Lewis
Tax Consultant
Bates Wells & Braithwaite London LLP
2 – 6 Cannon Street
London EC4M 6YH
Tel: 020 7551 7777
E-mail: [email protected]