At the end of March, our VAT Helpline provider Crowe UK LLP published insights on common trading activity VAT issues for charities in 2021. The following are a couple of the key topics flagged that we thought would be of particular interest to colleagues in the network, whether you are VAT registered or involved in VAT-exempt/non-business activities that also undertake trading activities such as sales from charity shops, cafes and other social enterprise activities.
- Donated Goods Retail Gift Aid Scheme and VAT
The Retail Gift Aid scheme is used by many charities in order to treat what would have been the sale of donated goods as donations of cash by acting as agent for the owners in selling their goods. This enables the charity to be able to claim Gift Aid.
It is important to note, that from a VAT perspective, this changes the nature of the transaction entirely. If donated goods are sold, the shop is making a zero-rated taxable business activity which enables VAT recovery on associated costs. Whereas, if a charity is selling goods on behalf of someone in return for a donation, this is a ‘non-business activity’ and so while there is no VAT due on the donation, VAT cannot be recovered on the associated costs.
This can result in the shop being required to apply an apportionment to arrive at the correct amount of VAT recoverable in relation to the shop costs so VAT administration increases and VAT recovery is reduced.
Solution: To properly operate the scheme, the charity should charge a VAT bearing commission to the donor of the goods. This does mean a small amount of VAT being paid to HMRC but VAT on associated costs incurred on the shops can be recovered in full.
Further note on donated goods: Please note that the zero-rating can only apply to donated goods sold in their current state and some repair works/painting would be allowed. Where items are ‘upcycled’ e.g., donated pallets turned into garden storage units, the standard rate of VAT must be applied to sales.
- Effect of COVID-19 on VAT recovery rates
The COVID-19 pandemic has resulted in many charity shops, cafes and social enterprise activities to close temporarily. This could have an impact on the amount of VAT recoverable on overhead costs, particularly where the charity uses an income-based apportionment as the proxy for recovery (e.g., the standard method of partial exemption). This is because taxable income has been reduced while exempt income may have remained constant. For example, care services in general will have continued during lockdown, while shops/cafes and conference venues have remained closed.
Solution: Apply to HMRC to agree an alternative recovery method for the year. HMRC has released an information sheet which states it will look at these requests sympathetically and has set up a purpose-built inbox to review these applications. We would suggest that charities review their recovery rates to see if there has been, or will be (using a forecast), a heavy reduction input tax recovery so this can be addressed. HMRC’s release can be accessed here.
Should there be sufficient interest from across the sector, Crowe have indicated they will look to record a 10-minute webinar providing more detailed information on this subject. Please register your interest here.
Please contact the Age UK VAT Helpdesk on 0207 842 7499 or AgeukVAT@crowe.co.uk or your usual professional contact if you wish to discuss any of the above issues further.
Shared with thanks to Crowe UK LLP.