CharitiesBriefing

December 2015

In this issueThe Children’s Society caseWe review the impact of the Children’s Society case in terms of charities’ ability to reclaim VAT – page 1

Employer Compliance ReviewsAre you prepared for an Employer Compliance Review? We highlight common issues – page 3

The theatre tax creditOur article looks at the complex rules governing the valuable theatre tax credit – page 6

Charities Briefing

Editor’s comment

Are you prepared for an Employer Compliance Review? Page 3

Donor benefit wish list Page 2

The Children’s Society case 10 years on Page 1

Welcome to the December 2015 issue of Charities Briefing, our regular newsletter for

charities and other not-for-profit organisations.

We publish our latest issue hot on the heels of the 2015 Spending Review and Autumn

Statement, in which the government announced a consultation on the removal of the

25% corporation tax charge applied to loans or advances made by certain companies

(close companies) to a charitable trust for charitable purposes. This is relevant where

trading subsidiaries have been lending funds to a parent charitable trust in advance of

donating profits using Gift Aid.

There was also good news for Sixth Form Colleges in England, which are to be given

the opportunity to become academies, allowing them to recover their non-business

VAT costs. This strengthens further the case for VAT refunds for charities providing

essential public services, where the competitive playing field is anything but level on

VAT recovery for private, governmental and charity suppliers. Indeed, in this issue,

VAT is the focus of our articles on the 10-year anniversary of the important Children’s

Society VAT case and also the thorny issue of VAT and postage.

Other articles consider new Gift Aid forms; some key areas where charities are often

vulnerable in terms of Employee Compliance Reviews; and we give an overview of the

theatre tax credit. Our article considers some of the key points of this rather complex

tax relief, which can be very valuable for charitable production companies.

As ever, I hope that you find this newsletter both interesting and informative. Do

please let me know if you have any queries on the topics discussed, or suggestions for

future topics. My email address is: liz.hazell@saffery.com. And finally, may I take this

opportunity to send you our very best wishes for the festive season.

Liz Hazell

New Gift Aid declarations Page 4

VAT and postage Page 8

The theatre tax credit: a valuable tax relief Page 6

In brief Page 9

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December 2015

The Children’s Society case:

10 years onThis year marks the tenth anniversary of the landmark VAT decision in the Children’s Society case. The case was in relation to the recovery of input VAT on professional fundraisers’ fees and other costs associated with regular amounts paid by supporters to be supporters of a “Club”.

The Children’s Society ultimately appealed to the High Court, where Counsel argued that income raised from voluntary income such as donations could be used for any purpose in the organisation. This being so, the costs associated with raising this income should be partially recoverable as a general overhead. The case was helped by a European Court of Justice (ECJ) decision in the case of an Austrian taxpayer (Kretztechnik AG v Finanzamt Linz (C-465/03)), which although it was related to a share issue, had the same argument.

The success of the appeal at the High Court provided an exceptional opportunity for charities that had incurred VAT costs in raising unrestricted voluntary income (such as donations or legacies) for this to become partly recoverable. The case drew a distinction between unrestricted and restricted income, adding a further layer to the complex VAT accounting rules in place.

Raising restricted income would normally be for a non-business purpose and therefore the input VAT incurred in raising these funds would be blocked.

This case also led to the charity sector being able to submit ‘Fleming claims’ for further input tax refunds back to their earliest registration date for VAT purposes. It also paved the way for additional claims for compound interest on these backdated claims to be submitted.

The charity sector as a whole has benefitted enormously from this landmark ruling, which was led by Russell Moore at Saffery Champness. The benefit is estimated to be in the tens of millions and the charity sector continues to benefit from this ruling today.

If you think you may have overpaid VAT, contact Alison Hone on T: +44 (0)20 7841 4000.

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Charities Briefing

Donor benefit

wish listOur last Charities Briefing featured HM Revenue & Customs’ (HMRC’s) call for evidence over Gift Aid donor benefits. In this article we look at a possible wish list for the overhaul of the donor benefit rules.

At present, benefits are ‘valued’ from the donors’ perspective even if there is no cost to the charity. It would be easier for charities to calculate the value of benefits using the cost data that is already available to them, especially as equivalent retail values for many benefits, such as galas, can be difficult to find.

The rule relating to benefits received ‘in consequence’ of a donation is unclear in the context of benefits provided by third parties. An exemption for benefits that are volunteered by third parties and are unsolicited by the charity and the donor would be welcome. Such benefits can help raise a charity’s profile by bringing it to the attention of potential new supporters.

The bands for the financial limits for donor benefits create an anomaly, with the maximum value of benefits being £25 for a donation of £1,000 but £50 (and 5 pence) for a donation of £1,001. Allowing the 5% benefit value to apply to donations of £500 or more may assist charities to develop more attractive supporters’ schemes, generating longer-term and more generous patterns of giving.

A ‘nil value’ could be set for certain token items, such as pens and badges that are below a minimum cost, so that they can be ignored for Gift Aid. They are often provided to raise a charity’s profile rather than to reward donors and excluding such items would minimise the records that would have to be kept of trivial benefits.

Exemptions from the benefit rules could be given for low value generic items that are provided in furtherance of a charity’s objects. There would need to be restrictions to ensure that donors are not receiving significant personal benefit.

In place of having financial limits for benefits, their cost could be deducted from the donation with the net amount qualifying for Gift Aid. This would give charities the option of providing more by way of benefits without losing Gift Aid on the balance of the donation above the cost of the benefits. This would replicate the split benefit rule that can apply to membership schemes and charity auctions.

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December 2015

Are you prepared for an Employer

Compliance Review?No employer relishes the prospect of an Employer Compliance Review from HM Revenue & Customs (HMRC). Whilst no charity will be immune from a routine inspection, timely and accurate filing of all tax returns can help to reduce the likelihood of being targeted for a risk-based review. Having an awareness of risk areas and taking mitigating action will also give you control and protection during an inspection.

We see many areas where HMRC uncovers arrears of tax and National Insurance during an Employer Compliance Review, but some common problem areas for charities are examined below:

Self-employed individuals

Charities may find themselves without the resources to engage individuals on full-time employment contracts and/or may need to engage specialist skills from time-to-time. We therefore see a relatively high level of self-employed workers engaged by employers in the charity sector. This brings a degree of risk in that HMRC will scrutinise arrangements to ensure that self-employed status is appropriate. Charities can protect themselves by having robust contracts and a documented process of reviewing the working arrangements for all self-employed individuals to ensure that self-employment can be supported.

Staff entertaining

Whilst a charity is unlikely to spend lavishly on entertaining its own staff, taxable staff entertaining can arise inadvertently. For example, if staff have a meal out at or close to their normal place of work a benefit in kind arises – this might be a celebratory meal for example or simply a matter of necessity where a meeting is confidential, or where there are insufficient meeting rooms such that a meeting has to be held off-site. A working

lunch on-site can also be taxable unless it is available to all staff. The most appropriate way of dealing with any taxable staff entertaining is to capture the costs and to account for the tax and National Insurance to HMRC annually using a PAYE Settlement Agreement.

Expenses and credit card payments

HMRC will scrutinise expenses payments and amounts charged to a charity’s credit cards. The employer’s best defence is to have in place a robust expenses policy which is actively policed internally.

Two common problem areas are:

Personal mobile telephone billsAs most of us now are on fixed tariffs it is difficult to demonstrate that an employee has incurred any additional cost for business use. If a proportion of a fixed tariff or an employee’s full mobile bill is reimbursed to them, PAYE and National Insurance liabilities will arise. Where an employee needs a mobile for business use it is tax efficient for them to be provided with a company phone as this will not incur tax and National Insurance liabilities.

Home to work travelThis can be difficult to identify and easy to get wrong, particularly where an individual has more than one place of work. A clear policy and guidance to employees and approvers of expenses is important in this area.

These are just a few of the main problem areas and each employer will have their own risk areas to identify and manage. We can provide advice and support before, during or following an HMRC Employer Compliance Review.

We... see a relatively high level of self-employed workers engaged by employers in the charity sector. This brings a degree of risk in that HMRC will scrutinise arrangements to ensure that self-employed status is appropriate.

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Charities Briefing

New Gift Aid

declarationsHM Revenue & Customs (HMRC) has recently published new model Gift Aid declarations. The declarations have been shortened and unnecessary references to VAT and Council Tax have been removed. Charities holding stocks of printed materials showing the previous declaration may continue to use the original wording until April 2016. The new wording must be used from 6 April 2016.

By concession, HMRC will allow charities to use up existing stocks of printed materials after April 2016 so long as they can demonstrate that they had pre-existing stock before the guidance was published on 22 October 2015 to use up. This will be of particular assistance to churches that may have substantial stocks of pre-printed Gift Aid collection envelopes, but the concession is not restricted to religious charities. Declarations that are already in place from existing donors do not need to be updated.

Copies of the new declarations can be found at: www.gov.uk/guidance/gift-aid-declarations-claiming-tax-back-on-donations.

As before, there are separate forms for one-off donations, multiple donations (covering donations in the preceding four years and all future donations) and sponsored events. HMRC has taken the opportunity to introduce separate forms for charities and community amateur sports clubs (CASCs) as the reference to CASCs on the earlier version was confusing.

The declaration for a single donation is reproduced on page 5.

The declarations make the benefit of Gift Aid to charities clearer by stating: “Boost your donation by 25p of Gift Aid for every £1 you donate”.

Attention is also drawn to the donor’s responsibility to make good any shortfall between the tax he or she pays and the Gift Aid claimed by the charity on his or her donations with the statement: “If I pay less income tax and/or capital gains tax in the current tax year than the amount of Gift Aid claimed on all my donations it is my responsibility to pay any difference”. HMRC is keen to ensure that donors are fully aware of the requirement to have paid sufficient tax.

The declarations can incorporate a charity’s own branding and additional wording but they must include the following:

1. The name of the charity or CASC

2. The donor’s name

3. The donor’s home address

4. Whether it covers past, present or future donations or just a single donation

5. A statement that the donor wants Gift Aid to apply, which can be by way of a tick box

6. An explanation that the donor needs to pay the same amount or more UK income tax and/or capital gains tax as all charities and CASCs will claim on the donor’s gifts in a tax year and that the donor is responsible for paying any difference.

The use of HMRC’s model declarations is recommended in order to minimise the risk of losing Gift Aid because of an incorrect declaration.

The declarations... draw attention to the donor’s responsibility to make good any shortfall between the tax he or she pays and the Gift Aid claimed by the charity on his or her donations.

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December 2015

Charity Gift Aid Declarationsingle donation

Boost your donation by 25p of Gift Aid for every £1 you donate

Gift Aid is reclaimed by the charity from the tax you pay for the current tax year. Your address is needed to identify you as a current UK taxpayer.

In order to Gift Aid your donation you must tick the box below:

I want to Gift Aid my donation of £ to:

Name of charity

I am a UK taxpayer and understand that if I pay less income tax and/or capital gains tax in the current tax year than the amount of Gift Aid claimed on all my donations it is my responsibility to pay any difference.

My details

Title First name or initial(s)

Surname

Full home address

Postcode Date

Please notify the charity if you:

• Want to cancel this declaration

• Change your name or home address

• No longer pay sufficient tax on your income and/or capital gains.

If you pay income tax at the higher of additional rate and want to receive the additional tax relief due to you, you must include all your

Gift Aid donations on your self-assessment tax return or ask HM Revenue & Customs to adjust your tax code.

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Charities Briefing

The theatre tax credit:

a valuable tax reliefHM Revenue & Customs (HMRC) has recently published guidance on how the creative industry tax relief, already widely used by the film, television and video gaming industries, applies to theatrical production. This is the first such relief that is expected to have a significant impact on the charity sector and in this article we outline some of the key points.

Who can qualify?

In order to claim the relief you must be a theatre production company and you must produce a qualifying theatrical production for commercial purposes. A charitable company could be an eligible production company, but a charitable trust could not.

How does it work?

The relief was introduced on 1 September 2014 and any expenditure since that date can be considered.

To be eligible for tax relief, the costs must constitute the ‘core expenditure’ of producing and closing the show and be incurred in the European Economic Area (EEA). Any costs that are not directly related to producing the show, such as marketing, raising finance, advertising, legal fees or accountancy fees, do not qualify. The costs of running the show also do not qualify.

In order for the production to qualify, at least 25% of the core expenditure must be incurred within or spent on services carried out within the EEA.

The eligible costs will lead to an additional deduction in the corporation tax computation that, if they lead to a loss for tax purposes, can either be surrendered for a cash payment, known as a theatre tax credit or carried forward against future profits of the same trade. Crucially, a trade is the same production and so a future show by the same company would be classed as a separate trade.

For a non-touring show the theatre tax credit is available at 20% of the lower of 80% of core costs or the trading profit.

Potential pitfalls

There is a great deal of detail in the official guidance and plenty of pitfalls for the unwary,

so professional advice is essential from the earliest stage. A few important points to note are as follows:

y A qualifying theatrical production is a ballet or dramatic production.

y A dramatic production is a production of a play, an opera, a musical or other dramatic piece where the performers are to give their performance wholly or mainly by the playing of a role.

y The presentation of live performances should be the main object, or one of the main objects, of the performance.

y The production must not have as its main purpose either the advertisement or promotion of goods or services, consist of or include a competition, the use of a wild animal, a performance of a sexual nature or the making of a relevant recording.

y It must be intended at the outset that a high proportion of the performances are either given to paying members of the general public or for educational purposes.

y As already noted, each show is classed as a separate trade and so each show must be accounted for and reported separately. This would apply even where the same company was putting on a series of shows in repertory style. In these cases, if some elements of expenditure (eg props or costumes) are being used in more than one production then the costs must be apportioned in a fair and reasonable way.

Touring

A higher rate of relief is available to loss-making touring productions: 25% of the loss surrendered as opposed to 20% for non-touring productions.

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December 2015

A production is only classified as ‘touring’ when it is intended at the beginning of the production phase that it will either perform in:

y Six or more separate premises; or

y At least two separate premises with at least 14 performances in total. The premises must be distinct and separate locations.

How is relief claimed?

Relief is claimed through the annual corporation tax return.

The profits and losses of each production must be calculated separately and it is advisable to include each on a separate information page at the back of the accounts.

Subcontracting to a trading subsidiary

Many charities will choose to subcontract the production of the show to a wholly owned company that acts as the theatre production company. The subsidiary must be able to demonstrate that it is responsible for all major production decisions. It may subcontract some

of the production activity back to the charity and the charity may provide facilities such as rehearsal space and labour but the theatre production company should retain creative control. Formal legal agreements must be in place to set out the roles and responsibilities of each company.

Advantages and disadvantages A charitable company could claim the relief directly on an annual basis. For smaller charities that operate primarily as production companies, this is likely to be the simplest and most cost-effective option. The charity would need to submit a corporation tax return annually, but no additional costs of accounting and setting up legal contracts would be incurred. If a charity does not have its own premises and its activities consist mainly of producing shows, this is likely to be the best option.

Where a charity has multiple activities or owns its own spaces there may be significant advantages to using a separate company:

y Charities only have to complete a corporation tax return in years where they are specifically requested by HMRC.

Therefore, the production of a return just for the corporate entity might be simpler.

y A charity could charge any production company (connected or not) a fee for the use of its rehearsal spaces, equipment and expertise. Invoicing these to a separate production company provides a clearer audit trail.

There is no clear way that is better than the other and the size and complexity of the organisation is likely to play a part. In addition, the VAT status of the group and the impact on cash flow may need to be considered.

There are added complications for co-productions, productions spanning more than one financial year, productions with some expenditure outside the EEA, productions that go through a significant rework or recasting during their lifespan but at Saffery Champness we are able to advise on any specific issues you might face.

We have already worked through several substantial claims that have been repaid to charitable groups, showing that there is a real opportunity here for the charitable theatre sector.

There is a great deal of detail in the official guidance and plenty of pitfalls for the unwary, so professional advice is essential from the earliest stage.

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Charities Briefing

In June 2015, HM Revenue & Customs (HMRC) finally updated its guidance and clarified its view on the VAT treatment of delivery charges and postage. This welcome update ended a long and difficult period for charities and their suppliers, where the long-standing and advantageous rules on the VAT treatment of single supplies and consolidation had been brought into question.

HMRC has clarified its position on the VAT zero rate and its application to charities’ mailing packs supplied with direct mailing services. This guidance is essential for charities and other users which cannot reclaim VAT.

Charities and their suppliers can now have a much better understanding of what HMRC agrees may be treated as a supply of ‘delivered goods’ (VAT zero-rated) or a supply of direct marketing (VAT standard-rated).

The key change is that from 1 August 2015, suppliers will need to ensure that they only print mail packs with addresses supplied by the customer (a charity or otherwise) and they must not distribute these anywhere other than to a delivery company’s premises.

The delivery must be made by a third party which contracts with the charity for these services. In some cases, the print company may act as agent in procuring the mailing service or use one of the Royal Mail downstream access provisions.

An important discussion point was whether there was any scope for HMRC to retrospectively assess for errors made previously. HMRC has subsequently published Revenue and Customs Brief 10 (2015): VAT - direct marketing services using printed matter. This explains HMRC’s approach to supplies of direct marketing that have been wrongly treated as zero-rated supplies of delivered goods. It also sets out those

circumstances where HMRC will not take action to assess for past errors, confirming that the transitional period during which the retrospection concession applies ended on 31 July 2015.

Importantly, it made clear that a requirement of these ‘transitional arrangements’ was that the supplier notified HMRC that they intend to apply the arrangements by 30 November 2015. It also describes the settlement terms available to businesses whose supplies do not come within the scope of the transitional arrangements. Any charity which has identified a potential risk with this should seek advice to ensure there are steps in place to avoid this.

One particularly helpful piece of clarification was on the VAT treatments of inserts. It was confirmed that inserts in a third-party publication qualify for VAT zero rating under the advertising concession and therefore any design and production of these adverts would also be zero-rated.

We hope that we now have the final clarification in this rather drawn-out and complex matter. There is no doubt that the tax bill to the charity sector will have increased as a result of this VAT issue, which is disappointing. There may, however, be an opportunity for charities to consider how additional VAT costs can be recovered.

VAT and

postage

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December 2015

In brief

Proposed changes to fundraising regulations

The current approach to the self-regulation of fundraising is not working according to the Etherington Fundraising Review, which was published in September.

The review recommends that there should be a new regulator, which would be:

y Independent of the Institute of Fundraising;

y Able to apply sanctions to deter and address breaches of fundraising standards, including naming and shaming offending organisations and putting a temporary stop to certain fundraising activities; and

y Funded by a levy paid by organisations that spend more than £100,000 per annum on fundraising expenditure.

The review also recommends the creation of a service like the Telephone Preference Service to enable people to opt-out of being approached by fundraisers.

The recommendations have been accepted in full by the government and are supported by the Charity Commission. The wider fundraising sector has, however, expressed concern that a system like the Telephone Preference Service could make it more difficult for charities to make contact with donors, damaging income from and relationships with donors. The debate continues.

New guidance for defined benefit pension schemes

The Pensions Regulator has published the first in a series of guides for trustees of defined benefit occupational pension schemes to help them apply the defined benefit funding code of practice.

The guide provides practical guidance on how to:

y Assess the employer covenant of a defined benefit pension scheme as part of an integrated approach to managing scheme risks; and

y Monitor the covenant and take action to improve scheme security.

This guidance is aimed at the trustees of defined benefit occupational pension schemes and their advisers, but will also be of interest to the employers of these schemes and their advisers.

More information can be found at: www.thepensionsregulator.gov.uk.

Annual return 2015

For those of you who have yet to file your annual return 2015 with the Charity Commission, you will need to state whether you have policies for: risk management; investment; safeguarding vulnerable beneficiaries; conflicts of interest; volunteer management; complaints handling; and paying staff.

You will also need to confirm whether or not you have reviewed your financial controls during the reporting period. The Charity Commission has stated that it has introduced the new requirements to help it to risk profile the charities on the register. We recommend that you develop policies that cover the above to the extent that they are relevant, and that these are in place before the annual return is submitted.

More information is available from www.gov.uk in the publication entitled Guidance to help complete the annual return for 2015.

Kenny McDowell joins Saffery Champness

Kenny McDowell recently joined Saffery Champness as a partner, based in the firm’s Edinburgh office. He brings with him over 20 years’ experience of providing assurance and advisory services to charities in the theatre and arts, education, and care sectors, as well as faith-based charities and grant-making organisations.

Kenny has specialist experience in FRS 102, Charities SORP and micro reporting developments, and is a member of a number of national committees which are at the forefront of technical development in these areas.

Liz Hazell, Head of Saffery Champness’ Not-for-Profit Practice Group, commented: “I am delighted to welcome Kenny to the firm. His track record in providing charities with practical, commercial advice, coupled with his experience as a member of the UK Charities SORP Committee, mean that he will be a great asset to our team.”

Saffery Champness is regulated for a range of investment business activities by the Institute of Chartered Accountants in England and Wales. Saffery Champness is a member of Nexia International, a worldwide network of independent accounting and consulting firms. No responsibility for loss occasioned to any person acting on or refraining from action as a result of the material in this publication can be accepted by Saffery Champness. © Saffery Champness, December 2015. J6196.

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Russell Moore, Partner, VAT London

Michael Strong, Partner Bristol

Liz Hazell, Partner Head of Not-for-Profit Group London

John Shuffrey, Partner London

Cara Turtington, Partner London

Kenneth McDowell, Partner Edinburgh

Mark McGarry, Partner, Tax London

Alison Hone Director - Charity VAT London

Nick Fernyhough, Partner Bournemouth

Jane Hill, Partner Peterborough

David Humphrys Director - Tax London

Alison Robinson, Partner Harrogate

Our key contacts

Karen Bartlett, Partner High Wycombe

www.saffery.com

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