Finance News: Fines threat from new VAT rules

Charities could face fines by HM Customs and Excise unless they declare their efforts to avoid paying VAT.

Accountants Deloitte & Touche are warning that charities may fall foul of draconian new regulations aimed at clamping down on tax avoidance because they are not aware that they apply to them.

"Most charities would say that they don't go in for tax avoidance," said Tony Jaras, head of the charity VAT team at Deloitte & Touche. "But the new rules are so widely drawn that many could easily find themselves in trouble for what they thought was just good financial housekeeping.

"The onus is firmly on charities to decide whether their arrangements contain so-called 'hallmarks of avoidance'."

Charities with turnover of more than £600,000 have to report "listed schemes" to HM Customs and those with turnover in excess of £10m will have to declare arrangements that have the 'hallmarks of avoidance'.

The kind of practices that will come under the microscope include leasing arrangements where a charity's trading arm buys equipment, leases it back to the parent charity and then claims the VAT back on the original purchase.

The regulations also cover property transactions where a charity sets up a 'captive building company' to take advantage of zero-rated VAT on building work and professional services.

But Jaras said that charities should be aware that most practices are perfectly legal.

"The subtext is that HM Customs is really trying to discourage charities from doing this kind of thing. But it is not illegal and charities should not feel intimidated into stopping various practices from which they gain tax advantages," said Jaras.

"This is not an off-the-shelf tax dodge, but things that charities will have been doing unconsciously for years. It includes every single major charity."

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