From 4 January 2011 the standard rate of VAT will increase to 20%. It has been estimated that this could cost the Scottish charity sector an additional £15 million - at a time when funding is already being cut.

Time is running out if the Government wants to do anything to help the charity sector. However, there are already a number of ways that charities can make VAT savings and efficiencies.

• Advertising and publications – charities qualify for zero rated advertising. They should ensure that they do not pay VAT on advertising and that all publications are zero rated.
  
• Fuel and power – where non-business activities exceed 60%, charities are exempt from climate change levy and should incur the reduced rate of VAT on fuel and power bills (5%). Changes should keep out the VAT chill by ensuring they avoid VAT on fuel and power wherever possible.
  
• Staff – VAT should not be charged or incurred where seconded staff perform a non-business function.
  
• Donated goods – the sale of donated goods is zero rated. While no input tax is due, the income should be included in VAT calculations as it will improve the recovery of VAT.
  
• Change of VAT rate – by controlling tax points you could reduce the cost of irrecoverable VAT as the items will cost less. Consider making significant purchases should be considered before the VAT rate changes on 4 January 2011.

For further information, please contact Scott Craig, VAT partner at Scott-Moncrieff - scott.craig@scott-moncrieff.com

Funding Agreements and VAT

Historically grant funding has always been outside the scope of VAT.  This position still applies as long as no goods or services are provided to the funder.

In the current financial and political climate changes to funding agreements can often affect the VAT liability of the funding. 

Where grant income is received in return for a specific and measurable supply of services or goods the income received is seen as consideration for a supply.  If the supply is liable to standard or zero-rate VAT the income received will have to be recorded and accounted for.  It could even result in a requirement to register for VAT.

If the correct liability is not identified it will expose a charity to challenge and assessments from HMRC.  Furthermore, if standard-rate VAT is applicable, and this is not acknowledged or budgeted for, it could reduce the funding received by or available to the charity.

In our experience we have found that funding agreements do not normally identify or acknowledge VAT.  In some cases the terminology used can be misinterpreted.

In an attempt to avoid confusion and unnecessary challenge or cost we would suggest that the terms of funding arrangements or agreements are considered from a VAT point of view at an early stage. 

It is worth remembering that the application of VAT to grant funding could be beneficial.  As long as the funder can recover the VAT charged, the increase in taxable activities should allow a charity to recover additional VAT from HMRC.

If you would like further information or advice on these matters please do not hesitate to contact any member of our VAT team.

Edinburgh

Scott Craig: scott.craig@scott-moncrieff.com
Alan Glen: alan.glen@scott-moncrieff.com
Iain Masterton: iain.masterton@scott-moncrieff.com

Tel: 0131 473 3500

Glasgow

Greg McNally: greg.mcnally@scott-moncrieff.com
Anthony Cochrane: anthony.cochrane@scott-moncrieff.com

Tel: 0141 567 4500