Alex Coxon looks at the tax costs associated with fundraising - and the ways in which charities can avoid extra expense.
VAT is a matter for businesses making money out of luxury goods - right? Wrong - unfortunately, charities and non-profits are also affected, especially when it comes to fundraising.
The subject became big news last year, when the High Court ruled in favour of the Children's Society, which had argued that some general or unrestricted fundraising should be viewed as a business activity, which would allow charities to reclaim VAT on items they had bought for fundraising purposes.
The Children's Society asserted that where money from general or unrestricted fundraising was going to be used for 'business activities' - those involving the exchange of goods or services for cash or in non-monetary deals - then VAT incurred on the expenditure associated with raising those funds should be partially recoverable.
The ruling allows charities for the first time to reclaim VAT on their fundraising expenditure from HM Revenue & Customs.
But VAT still applies in many cases. The following points, based on the five most common ways to raise funds as identified by HMRC, should give readers an outline of what's involved and how best to avoid unnecessary expense.
1Donations Although many of the things charities do are regarded as 'business activities' for VAT purposes, donations are not seen in the same way. As long as the donor has freely given a donation and nothing has been given in return, it can be considered a non-business activity and is therefore not subject to VAT. The technical term for this is 'outside the scope'.
Sometimes a charity will give something in return for a donation. A letter of thanks is fine as far as it goes, but running a corporate donor's logo on your website, for example, would be seen as sponsorship - a business activity (see section 5).
2Fundraising events Events that raise money for the benefit of a charity, such as balls and dinners, are generally exempt from VAT if the event is organised by the charity or a subsidiary company that is wholly owned by the charity and transfers all profits directly back to it.
There are a few caveats. "Only 15 events of the same kind can be held in one location during a financial year, and exemption won't cover income generated after the event," explains Scott Craig, head of the VAT practice at chartered accountants Scott-Moncrieff. "The sale of surplus commemorative items, for example, might not qualify for exemption."
The downside with exemption on fundraising events is that organisations cannot claim back the VAT they have paid on goods and services purchased for a particular event.
However, there are ways around this. "Employing a freelancer to organise a particular event can be advantageous when they are not themselves registered for VAT," says Charles Nall, corporate services director at the Children's Society. "If they are not registered, they can't charge you VAT. And because VAT is non-recoverable in this instance anyway, you won't be out of pocket.
"By using freelancers rather than going through one large firm, you could save a lot of money. Alternatively, you could try to get goods and services donated free of charge."
3Sponsored events Charities that organise their own sponsored events can take advantage of VAT exemption in the same way they can with balls or dinners. Save the Children, for example, holds an annual tennis tournament that qualifies as a fundraising event because it organises the competition on its own.
"If it wasn't an internal fundraising event, it would be subject to VAT," explains Nick Kavanagh, finance director at Save the Children and chair of the Charities' Tax Reform Group. "Events put together by commercial, VAT-registered organisers are taxable at standard rate - charities will pay for this when they buy goods or services from that organiser."
When it comes to money raised by participants in a commercially organised event such as a marathon, these funds can be treated as donations - even if the charity has had to pay for places and regardless of how much individuals raise. However, if a charity insists that its participants must pay a registration fee or raise a minimum amount before they can take part, that minimum fee then becomes liable to standard rate VAT.
Charities can get around this by not insisting on payment up front and by wording sponsorship packages in such a way that individuals simply 'pledge' or 'commit' to raising a certain amount of money.
"By saying 'this has cost us pounds x and we would like you to commit to raising at least pounds y', you can ensure that your participants will cover your costs and guarantee that any surplus funds are regarded as donations by HMRC," says Eric Grounds, director of fundraising at Sue Ryder Care.
4Charity challenge events Many charities organise fundraising challenge events, such as treks or bike rides, that include travel and accommodation.
If travel and accommodation is for more than two nights, the event doesn't qualify for fundraising exemption.
Where such events are not exempt, they are normally subject to the Tour Operators' Margin Scheme. "When a charity works with a third party or buys accommodation, airfares or sightseeing tours, and offers these items as packages to potential participants, they are seen to be functioning like any other tour operator," explains Craig. "In these instances, the exemption cannot apply and standard rate VAT may be due on any surplus generated from the event."
Interestingly, these rules change when events are held outside the EU.
Because VAT is not applicable in these areas, all activities are automatically zero-rated for UK tax purposes - making events held further afield potentially better value when it comes to a charity's VAT return.
However, unlike other zero-rated supplies, organisers will not be able to recover all of the input tax they incur on their charity challenge event packages.
They should be able to recover the UK VAT they incur on directly related costs that aren't included in the package itself - for example, sunglasses or T-shirts that are handed out to participants at the start of the challenge.
But they won't be able to claim back any VAT incurred on anything stipulated in the tour package - for instance, a weekend of mountain climbing as preparation for the overseas event.
5Sponsorship of a charity It might seem a simple part of the VAT/fundraising equation, but sponsorship deals are actually pretty complex. According to HMRC, sponsorship deals are non-business activities, exempt from VAT, as long as charities don't provide sponsors with significant benefits for their support.
HMRC defines 'insignificant' benefits as offering a sticker or naming a donor in a list. However, such recognition is rarely sufficient for corporate sponsors. "Imagine you are producing a programme for an event, and on the inside cover you say thanks to a corporate sponsor," says Oliver Sladen, head of finance at the NCVO.
"It would be considered 'insignificant' if you mentioned only the corporate's name and didn't detail what it did. But if you printed the advertiser's logo, that could be construed as a tangible benefit and would therefore be taxable at standard rate. The cross-over comes where the advertiser potentially reaps rewards from the arrangement."
This can also be problematic from the sponsor's point of view. "Where a company gives a donation to a charity and is in return allowed to use the organisation's name and logo in publicising the fact, it will actually be getting a benefit for its contribution," explains Kavanagh.
"This means that, for every promotion and event you work on, you have to work out the VAT status and determine whether the company is willing to be charged VAT on top of the original donation. Most businesses will be able to recover it as part of their own input tax, but some don't realise that this is the case."
For comprehensive guidelines on how VAT affects charities and the reliefs available, see VAT Notice 701/1 Charities on the HMRC website and go to section 5.9, which focuses specifically on fundraising activity. Also see leaflet CWL4 - Fundraising events: Exemption for charities and other qualifying bodies. See www.hmrc. gov.uk or call 0845 010 9000.
The Charity Finance Directors' Group provides VAT advice for members through its VAT Exchange. See www.cfdg.org.uk.
The NCVO publishes a step-by-step guide to VAT for voluntary organisations, which is updated annually. See www.ncvo-vol.org.uk/publications.
HOW IT WORKS IN PRACTICE
Still confused about VAT? The following examples should help clarify the VAT costs for typical fundraising events.
EXAMPLE 1: Charity X organises four fundraising dinners a year and an annual ball at the same venue. What are the VAT implications?
The income generated by a charity from fundraising events is normally exempt from VAT. The exemption covers admission charges, the sale of commemorative brochures and advertising in those brochures, items sold by the charity at the events and any sponsorship payments directly connected with the events. However, because the events are exempt, VAT incurred on all associated costs would normally be restricted from recovery as input tax.
EXAMPLE 2: Charity Y is considering paying for places in a commercially organised marathon and offering those places to individuals who will raise funds on the charity's behalf. What will it pay in VAT?
The income generated here is regarded as a donation, which is outside the scope of VAT, as long as the participants do not receive benefits in return. (Free training, running vests and massages during the event do not normally constitute 'benefits'.) However, if the charity asks runners to pay a registration fee or states that they must raise a minimum sum before participating, that payment becomes a taxable supply and is liable to standard rate VAT. Any payment in excess of the minimum fee should be treated as a donation.
Examples are provided by chartered accountants Scott-Moncrieff (see www.scott-moncrieff.com). Charities should consult their accountants and/or auditors if they are at all unsure about where they stand on VAT and fundraising.
VAT registration rules
- The current VAT threshold is £60,000, but this figure is subject to change annually. If a charity sells more than £60,000 worth of taxable supplies (see below) in a year (be they standard or zero-rated), they must register for VAT
- By registering, charities are able to recover VAT on standard and zero-rated activities that they have undertaken. If they don't register, they can't claim anything back
- Charities can choose to register voluntarily for VAT, and normally do so because they want to claim VAT back on goods and services they've bought from VAT-registered businesses. As long as a charity is making taxable supplies, it can register voluntarily
- Business activities - Although an activity undertaken by a charity may be performed to benefit the community or to advance charitable objectives, it can still be deemed a business activity for VAT purposes. For instance, VAT must be attributed to taxable supplies (see below), even if the funds from those sales are then used to run a charity's community centre
- Exemption - Some business activities are exempt from VAT. If a charity carries out exempt activities, it won't have to charge VAT. However, it cannot normally reclaim VAT on goods and services bought in respect of that activity
- Input tax - The VAT paid on goods and services purchased from VAT-registered businesses for a charity's business activities
- Output tax - The VAT a charity must charge on supplies of taxable goods and services
- Outside the scope - Activities not covered by VAT law, including non-business activities or business activities occurring outside the UK
- Reduced rate - The rate of VAT liable on supplies of certain goods and services. Currently 5 per cent
- Standard rate - The rate of VAT liable on business supplies of goods and services that aren't specifically exempted, zero-rated or reduced rated. Currently 17.5 per cent
- Taxable supplies - Standard, reduced or zero-rated goods or services sold by a charity that is registered for VAT
- Zero rate The rate of VAT (0 per cent) liable on supplies of certain goods and services - food or books, for example.