An update for charities on cost sharing exemption and Grant vs services.
VAT briefing for charities
Cost sharing exemption
As many charities will be aware, the cost sharing exemption enshrined in the European
VAT Directive is a means by which an independent group of persons can supply services to its members without creating a VAT charge. This provision has never been implemented into UK VAT law.
The European Commission recently published a paper setting out its view that the
exemption should have a broad application. Many member states are now looking
at their own VAT law and making changes. In the UK, HMRC has issued its longawaited
consultation document and has invited responses by the closing date of
30 September 2011 on how best to implement the provision.
The progress on this issue is to be welcomed; however, the UK has had ample opportunity to implement this provision. From a legal perspective, if the terms of a European Directive are sufficiently clear, taxpayers may claim direct effect. This means that it is possible that some charities are already eligible to benefit from this exemption and may have been so over a number of years. In a case such as this where the UK has deliberately disregarded EU law, it is arguable that charities would have grounds to claim damages for a breach of EU law rights. An example of where the cost sharing exemption would be of benefit is where a group of pure research charities decide to set up a shared IT or other function and make cost recoveries to the members.
Grant vs. services
Whether income should be categorised as funding or grant income is one of the biggest
VAT challenges faced by charities. Examination of any agreements in place is the logical starting point. By doing this it ought to be possible to ascertain whether money being paid to a charity is consideration for a service to be provided by the charity to the payer.
If so, there is a supply of services and VAT may be payable. However, it is not always as straightforward as this. Questions such as ‘whose project is it’ and ‘who is obliged to deliver the output’ will also need to be considered.
Even where it is possible to ascertain that the funds are consideration for a service, it may be the case that the service is not even subject to VAT.
In addition, charities may be under pressure to treat income as a donation rather than
sponsorship, particularly by those ‘donors’ that cannot recover their input tax in full. In
these circumstances it is essential that charities carry out a proper VAT analysis of what is being provided and to whom.
Ernst & Young is a global indirect tax practice which is experienced in providing support in relation to technical VAT issues. To discuss either of these issues in more detail, or any other VAT questions please contact a member of our team.
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