Three common trading activity VAT issues for charities in 2021
This article addresses three major VAT issues which we see charities dealing with on a recurring basis in relation to trading activities.
Who should read this article?
Any VAT registered charity or non-profit making organisation involved in exempt and/or non-business activities that also undertake trading activities such as sales from charity shops, cafes and other social enterprise activities.
The Issues
- Donated Goods Retail Gift Aid Scheme and VAT
The Retail Gift Aid scheme is used by many charities in order to treat what would have been the sale of donated goods as donations of cash by acting as agent for the owners in selling their goods. This enables the charity to be able to claim Gift Aid.
It is important to note, that from a VAT perspective, this changes the nature of the transaction entirely. If donated goods are sold the shop is making a zero-rated taxable business activity which enables VAT recovery on associated costs. Whereas, if a charity is selling goods on behalf of someone in return for a donation, this is a ‘non-business activity’ and so while there is no VAT due on the donation, VAT cannot be recovered on the associated costs.
This can result in the shop being required to apply an apportionment to arrive at the correct amount of VAT recoverable in relation to the shop costs so VAT administration increases and VAT recovery is reduced.
Solution: To properly operate the scheme, the charity should charge a VAT bearing commission to the donor of the goods. This does mean a small amount of VAT being paid to HMRC but VAT on associated costs incurred on the shops can be recovered in full.
Further note on donated goods: Please note that the zero-rating can only apply to donated goods sold in their current state and some repair works/painting would be allowed. Where items are ‘upcycled’ e.g. donated pallets turned into garden storage units, the standard rate of VAT must be applied to sales.
- Lottery ticket sales from shops
Most charities that operate a lottery sell tickets by entering into monthly agreements with customers who buy directly from a head-office. In addition, some tickets may also be sold in charity shops.
Lottery tickets are exempt from VAT, and therefore, no VAT is due on the sales but VAT cannot be recovered on associated costs. This again results in less VAT being recovered by the charity within the shops. It also adds an extra layer of administration as overhead costs of the shop would need to be apportioned.
Solution: In reality, the VAT bearing costs used by the shop to make the lottery/raffle ticket sales is minimal and so application should be made to HMRC to apply a fairer apportionment on shop costs where these sales exist.
- Effect of COVID-19 on VAT recovery rates
The COVID-19 pandemic has resulted in many charity shops, cafes and social enterprise activities to close temporarily. This could have an impact on the amount of VAT recoverable on overhead costs, particularly where the charity uses an income based apportionment as the proxy for recovery (e.g. the standard method of partial exemption). This is because taxable income has been reduced while exempt income may have remained constant. For example, care services in general will have continued during lockdown, while shops/cafes and conference venues have remained closed.
Solution: Apply to HMRC to agree an alternative recovery method for the year. HMRC has released an information sheet which states it will look at these requests sympathetically and has set up a purpose built inbox to review these applications. We would suggest that charities review their recovery rates to see if there has been, or will be (using a forecast), a heavy reduction input tax recovery so this can be addressed. HMRC’s release can be accessed here.
Should there be sufficient interest we will record a 10 minute webinar providing more detailed information on this subject. Please register your interest here.
Further information
Please get in touch with Robert Warne or your usual Crowe contact if you wish to discuss any of the above issues further.
