Liz Maher, Director Centurion VAT

It’s an old chestnut of an issue but one which just isn’t going away in the world of VAT, writes Liz Maher Director of Centurion VAT, which is why she welcomes the recent guidance from the Charities Tax Reform Group (CTRG).

Trying to decide whether monies received from a local authority or government body are actually payment for services rendered or a non business grant just keeps coming up as a VAT concern for charities we find. Often the position is not helped by a lack of clarity within the contracts.

At its basic level VAT is a transaction based tax and this is reflected in the recent CTRG note. Put simply you are making a supply by way of business if you deliver a benefit that has some value to a third party or to the grant provider in direct exchange for the monies received.

A good practical example is the difference between the following:

Grant to Charity:

Charity provides accommodation to the homeless and the council gives it a grant to support its’ activities. Whilst the activities of the charity benefit individuals in the council’s area there is no direct benefit or service provided to the Council itself.

Contract for Services:

The same charity is appointed by a different Council to run a Council owned homeless shelter on its behalf for which the charity receives a “grant” each year. The charity is making a supply by way of business and the charge needs to be considered in the VAT context. Does it make the charity exceed the VAT registration threshold? If already VAT registered – VAT will need to be charged but this does open up the opportunity to look at recovering VAT on costs incurred by the charity in delivering the service.

There are a number of VAT cases that have gone through the VAT tribunal system looking at the “is it a grant or contract” issue from a variety of perspectives. One case “ Trustees of the Bowthorpe Community Trust” back in 1996 determined that the existence of a written contract between the local authority and the charity for the charity to deliver work experience to the disabled in return for 50% funding of the charity was not a supply for VAT purposes even though a contract existed. Yet with the changing mechanisms of procurement we have seen many examples where now local authority bodies are going out to tender to both charity and commercial bodies for the supply of “vocational training” which is clearly regarded as the supply of training services under a contract.

Indeed there may be case when a charity actually wants to be seen to make a business supply rather be in receipt of a grant…a recent Dog Rescue Charity successfully argued that the “donation” it received from the new owners of a rescued dog was actually the payment for the supply of a pet and zero rated for VAT purposes which unlocked a sizeable amount of VAT on costs.

So what’s in the latest guidance note….interestingly the thing that struck me is the quote they’ve used from the National Audit’s Office’s (NAO) Commissioning Guide used by public sector bodies which states

“The rules on when you can use grant and when you can use procurement mean there are many situations when a public body could use either. You need to decide which one is more suitable for your programme, service or intended outcome and is likely to provide the better value for money.”

What is clear that going down the procurement route will lead the supplying charity into the realms of making a supply for business purposes and clearly there is the need to establish the VAT treatment of both the supply and the costs associated to that supply.

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