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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

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tax vat working with corporates
Tax, VAT & Working With Corporates

Bill Lewis

6 December 2011

tax why does it matter
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
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
Tax Exemptions
  • Primary Purpose Trading
  • Anciliary Trading
  • Small Scale Trading
  • Donations
  • One off fundraising events
small scale trading activities
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
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
Exemption covers
  • Admission charge, brochures, sales of advertising space, other items sold at the event, sponsorship, raffles
trading company
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
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
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
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
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
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
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
gift aid rules continued
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 continued1
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 continued2
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
Five Top Tips
  • Corporates always want publicity in return for payments - split between VATable and taxable fee for this and tax and VAT free donation
  • Make use of the "one off" fundraising events exemption
  • Claim gift aid on employee donations whenever you can
  • The tax reliefs for charities do NOT apply to the corporate supporters…
  • …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