New rules on charities with VAT exemption
Charities that make exempt supplies such as financial services, insurance services, care and welfare services...
...health services, cultural services, supplies of land and buildings, fundraising for charities, etc, may benefit from new rules. Following the consultation on ideas to simplify the partial exemption rules HMRC have announced four changes (one compulsory) that are effective from 1 April 2009.
1) For tax years commencing after 1 April a charity may use its previous year’s recovery percentage to determine the provisional recovery of input tax in each VAT return which will be followed by an annual adjustment. The new rules are not compulsory but if adopted must be applied consistently.
2) Some charities will have 30 April 2009 as their partial exemption year end and will now have the possibility of making their partial exemption annual adjustment on the April return which will be need to be submitted by 31 May. As it is optional the charity can leave the adjustment until it would normally be made on the July VAT return. Charities with later partial exemption year ends will also benefit.
3) A partly exempt charity is now able, if it so wishes, to recover input tax on the basis of use for certain tax periods starting after 1 April 2009. The rules are complicated but what HMRC are saying is that the charity is not committed to the standard method (or agreeing a special method) until after it first incurs exempt input VAT. The method chosen must be fair and reasonable and there would also need to be an annual adjustment at the year end but on the basis of use.
4) The scope of the standard method for VAT returns is compulsorily widened after 1 April 2009 to include virtually all supplies. This will affect those charities that:
- make supplies to customers outside the UK
- financial supplies such as shares and bonds
However, where supplies are made from overseas establishments the input tax relating to such supplies is to be recovered on the basis of use. This will need to be examined in the annual adjustment.
HMRC are to review the de minimis rules which apply where there is low expenditure relating to exempt supplies in 2009/10.
Sandra McClean, senior VAT manager at Horwath Clark Whitehill told Caritas:‘These changes have been brought into force very quickly given that the consultation period is so recent; however, it is too late for those charities with a 31 March year end that could potentially have made the adjustment before 30 April. The changes could simplify the accounting procedures as many software programmes do not cope particularly well with partial exemption let alone non business charity calculations. Charities should take advice because there are some potential pitfalls – these rules only apply to those using the standard method, not mixed non business partial exemption.’
Author: Clarissa Dann
Clarissa Dann was the editor of Caritas as well as an HR and management online service,he People Bulletin until July 2011.
She is now the editor of the specialist trade finance magazine, Trade and Forfaiting Review which can be viewed at www.tfreview.com but does write on charity finance and investment from time to time.
Clarissa has a background in legal and professional publishing, as well as business journalism and holds an MBA from
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