Don Bawtree: VAT is a tax that charities need to actively minimise

Also: HMRC's annual report, Charity Commission research on trust in charities and updates from the Financial Reporting Council

Don Bawtree
Don Bawtree

HM Revenue & Customs has published its annual report on charity tax statistics for the last fiscal year. It is a reminder of the range of tax reliefs available to charities, especially the often overlooked reliefs that have become the "Cinderellas", such as payroll giving and the Gift Aid Small Donations Scheme.

Gift Aid claims stayed constant at around £1.26bn, the GASDS stayed at £30m and payroll giving remained stuck at £40m. Rates relief increased from £1.91bn to £2.09bn, but this is mainly a factor of increased rates. Other tax reliefs reported on include stamp duty land tax and gifts of shares and property. HM Revenue & Customs has stopped reporting on VAT reliefs because it is too difficult – perhaps an indicator, first, of how complex VAT is for charities and, second, that this is a tax that charities need to actively work to minimise.

VAT

There have been two VAT announcements recently. First, HMRC has updated its guidance on the cost-sharing exemption. Charities that lose out on VAT when they recharge costs to each other can create a cost-sharing group, using the cost-sharing exemption originally introduced six years ago. HMRC has updated its guidance in this area on the following topics: when the exemption applies; the legal basis for the exemption; the types of businesses and organisations that can benefit from the exemption; and exempt supplies by social housing organisations.

Second, in July HMRC issued VAT guidance on making tax digital. From 1 April 2019, most VAT-registered charities will need to have functional compatible software, unless your religious beliefs preclude the use of computers. The software must be able to record and preserve digital records and exchange information with HMRC using its Application Programming Interface platform.

HMRC expects that software products will be available to do this, but some programs will not be able to perform all of these functions by themselves. HMRC will therefore allow a "soft-landing period" for organisations to have in place digital links between all parts of their functional compatible software. The guidance addresses a number of topics that charities will encounter, such as mixed-rate supplies, operating a margin scheme or retail.

Trust in charities

The Charity Commission has published its annual survey of what people think about charities – Trust in Charities 2018. Overall, it says trust and confidence in charities is in a slightly worse place than last year, but it also makes the point that a major factor in contributing to trust is transparency, especially around financial reporting. In a fascinating experiment, the regulator seems to show that the biggest effect on donor behaviour is not caused by being registered with the Charity Commission, nor by demonstrating impact, but by showing how the money is spent.

It identifies the key drivers of trust in charities as: transparency about where money goes; charities being true to their values; efficiency in the use of charitable resources; being well-governed and well-managed; and being able to demonstrate that they are making a positive difference.

The FRC

Audit quality and corporate governance continue to be a focus of attention. One change in the Financial Reporting Council’s updated corporate governance code requires remuneration committees to consider reputational and other risks from excessive pay. This is not a topic that often features on charity risk assessments, but it might be worth at least making sure that risk committees consider the point.

Meanwhile, the debate about the future of audit and audit quality continues. The Chartered Accountants’ Quality Assurance Directorate has reported on more than 1,000 audit reviews completed in 2017. It notes that, although audit quality has remained relatively consistent overall, there is still room for improvement. More than 75 per cent were considered acceptable, but 8 per cent required significant improvement. These statistics are broadly in line with previous years, and audit committees and treasurers should be asking their current or prospective accountants about these results, as part of the focus on audit quality.

Don Bawtree is lead partner for charities at accountants BDO LLP

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