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

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: b.lewis@bwbllp.co.uk