Charities and VAT

Is your Not for Profit organisation registered for VAT?  If it is registered can it recover a high proportion of Input VAT?

Much of the general public believes that Not for Profit organisations do not pay VAT but one authoritative source has recently indicated that UK charities incur £1 billion of irrecoverable VAT.  Many Finance Directors of UK Not for Profit organisations also believe that there is little that can be done to mitigate this loss of precious funds.

Think again as many other charities have discovered that through tried and tested methods it is possible to recover well in excess of 50% of their irrecoverable VAT. Situations differ of course but an evaluation of a charity's VAT position should be high on the list of priorities.
 

Most charities which are registered for VAT are unable to make full recovery of the VAT they incur and need to apply complex rules to purchases to identify the precise nature of their Attributable VAT irrespective of whether their expenditure, and Input VAT, is taxable, exempt, non business or outside the scope of VAT.

Commonly considerable effort is expended identifying the Attributable VAT categories for individual transactions and this is largely a manual process which is both time consuming and prone to error.  HM Customs & Excise are beginning to request that charities apply automated business rules to the processing of purchase invoices to ensure that the processing of invoices is guaranteed to be accurate and to reduce HM C&E audit costs.

In addition to the VAT processing complexities charities have special needs for the processing of VAT to better comply with the charity Statement of Recommended Practice (SORP).  The irrecoverable proportion of the Input VAT should ideally be backwards applied to the originating cost centre / account code for the specific expenditure incurred.

This is a very complex process to accommodate manually and very few if any charities get it absolutely correct. This has the effect of distorting the actual expenditure incurred in the various categories of expenditure (Direct Charitable, Support Costs, Management & Administration, Fund-raising etc.) which are proscribed by the Charity Statement of Financial Activity (SoFA).

Despite the transaction processing complexities involved charities should not shy away from reducing their irrecoverable VAT bill as the rewards can be considerable and solutions to the issues detailed above have been identified.

For more information Ask Charlie at charlie@askcharlie.co.uk

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