Tax, VAT & Working With Corporates

1. Tax, VAT & Working With Corporates Bill Lewis 6 December 2011

2. 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

3. 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?

4. Tax Exemptions • Primary Purpose Trading • Anciliary Trading • Small Scale Trading • Donations • One off fundraising events

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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.

13. 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.

14. 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

15. 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%

16. 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”!

17. 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

18. 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

19. 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