Don Bawtree: Have you considered your viability?

The UK Corporate Governance Code has been updated; theatre charities may be eligible for tax deductions and a long-running VAT case has reached its conclusion, writes our finance expert

Don Bawtree
Don Bawtree

The Financial Reporting Council has updated the UK Corporate Governance Code. Just as some charities are complaining about the extra disclosures required by the new Sorp, it is worth remembering that this is merely part of an overall push towards greater transparency in all corporate reporting - indeed, some charities already choose to follow the corporate code requirements. The new requirements will enhance the quality of information provided about the long-term health and strategy of listed companies, and about risk management.

The code requires boards to include a "viability statement" in their strategic reports to investors. In other parts of the not-for-profit sector - housing, for example - viability is a centrepiece of regulatory oversight, and it is noteworthy that the Charity Commission reviewed charities with net current liabilities over the summer.

The code has also been changed in relation to remuneration. Boards of listed companies will now need to ensure that executive remuneration is designed to promote the long-term success of the company and show more clearly to shareholders how this is being achieved. This link between remuneration and an organisation's success is rarely addressed in the charity sector - but, with the recent focus on high salaries, this is something charities should consider more often.

Since 1 September, firms involved in some types of theatre productions can claim £2 of tax deduction for every £1 spent on certain costs, and any resultant tax losses can be converted into the payment of a 25 per cent or 20 per cent tax credit.

On the face of it, a relief that works primarily by increasing tax-deductible costs does not appear to be aimed at the charity sector, where the income would be exempt from tax. But theatre productions are sometimes run by charities through commercial subsidiaries, perhaps to help limit any potential loss. In such cases, charities should make sure they do not miss out. In principle, if such a loss is incurred, a tax-credit payment should be available. As ever, this is more complicated than it appears and a number of other tax and legal issues would need to be considered.

The University of Huddersfield has been at the centre of a long-running VAT case concerning the abuse-of-rights argument previously determined in the widely known Halifax case. In 1995, the university decided to refurbish a derelict mill for use as a university building. It entered into a lease and leaseback arrangement with an unconnected trust. Both entities opted to tax, which enabled the university to deduct the input tax on the redevelopment up front, with output tax subsequently due on the rent payable under the lease. At this stage, therefore, the scheme gave a cash-flow rather than a net-tax advantage. The leases were collapsed in 2004.

In 2000, HM Revenue & Customs disallowed the input tax in an attempt at an abuse-of-rights argument. The case has been on tour ever since, and the upper tribunal has now confirmed that the transaction was indeed abusive. This means that the leaseback transaction is erased in its entirety, so the input tax on the mill is treated as residual and not fully recoverable.

The scheme used by the university has long since been overridden by legislation, but is indicative of how other schemes could be treated. It is also interesting to hear that there might well be further arguments still to be made in this case, so it is not closed. It serves as a reminder that artificial schemes intended to save charities from VAT are unlikely to work.

Don Bawtree is lead partner for charities at accountants BDO LLP

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