Don Bawtree: Could you survive without tax relief?

An increase in employment taxes and VAT could also put the future of some charities under threat, writes our finance expert

Don Bawtree
Don Bawtree

There is no let-up in the pressure on charities and other organisations over the issue of tax. The shadow education secretary, Tristram Hunt, has said that, under a Labour government, independent schools would have to do more to support their state counterparts in order to keep some advantages of charitable status. And a note from the Institute of Chartered Accountants in England and Wales suggests problems for charities that accept Gift Aid payments from subsidiaries that have no reserves. The Public Accounts Committee said that HM Revenue & Customs was "unacceptably slow" at taking action against tax-avoiders, and a recent survey by PwC showed that Britain's 100 biggest companies paid a record £80bn in tax in 2014 - an increase of £2bn on 2013, despite the fall in the corporation tax rate. The survey also notes that firms pay £3.27 in other taxes for every £1 in corporation tax.

A major factor in the higher tax take is an increase in employment taxes and VAT, which are not subject to any general charity-related relief. It all adds up to a tougher tax regime where charitable reliefs are threatened or made less useful. Charities need to consider tax risk and their exposure to non-compliance or loss of reliefs. In many cases the value of the tax reliefs is the margin of survival.

A risk that charities often overlook is counter-party risk - one that affects the charity as a result of another organisation getting into trouble. Some charities have been caught through their investment management or IT support arrangements. R3, the trade body for insolvency professionals, found a 28 per cent rise between 2011 and 2014 in the number of businesses closing down without going through formal insolvency procedures - this reduces the scope for creditors to recover funds, and charities might not get the chance to recover the debts due to them, whether they arise from trading sales or money held by third parties for other reasons. Trustees need to be alert to cash or debt concentrations building up with third parties.

Every year, the Financial Reporting Council issues guidance on corporate reporting by large public companies. Many charities aspire to similar levels of clarity in their accounts, so these comments can make for an interesting benchmark. The FRC's topics for boards to focus on next year include the accounting effect of any changes in the structure of pension arrangements, the effect of new accounting standards that will apply in the next few years, accounting for exceptional items to ensure companies present their results consistently rather than re-present them for odd transactions, and the quality of disclosure of critical judgements and estimates around accounting policies.

All of these considerations can apply equally to charities, as does the injunction for reports to be clear and concise.

VAT continues to create risks and opportunities for charities. Brockenhurst College submitted a voluntary disclosure to HMRC in 2010, arguing that the food served in its training restaurant and entertainment put on by its drama department were exempt because they were classified as educational, and it had therefore overpaid VAT on income received between 2006 and 2009 for tickets and meals.

The VAT tribunals agreed and HMRC will repay claims, but only where the claimants' circumstances are exactly the same as set out in an Upper Tribunal decision. However, the repayments will be subject to protective assessments in case the decision is reversed in the Court of Appeal, to which HMRC has appealed. A hearing will take place in February.

Don Bawtree is lead partner for charities at accountants BDO LLP

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