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Tax breaks for charities (and zoos!)

Posted: September 28, 2015

At first glance, the UK charity sector and zoos might not have a lot in common (the only ‘tax’ associated with animals ends in “‘idermy”’!), but actually both have a shared goal – to plough the murky waters of VAT in search of tax breaks!

And, if recent VAT tribunals are anything to go by, these ‘tax breaks’ might be closer to hand than either sector actually thinks. In one such case, the North England Zoological Society, a.k.a. Chester Zoo, recently argued that VAT partial exemption calculations should allow part of the VAT cost on the care of its animals to be recoverable as it was a cost component of their retail sales.

Slightly concerning was the initial skim-reading of the case report showing ‘animal welfare’ being closely linked to the supply of catering outlets in the Zoo, but reassuringly this was based on cost components and attribution of expenditure, rather than some grisly supply chain.

The tribunal stated “standing back to look at the overall picture, it seems to us that in the particular circumstances of the society’s economic activities the animal-related costs have adirect and immediate link to the catering and retail supplies. We are satisfied that economically the animal-related costs are a cost component of the catering and retail supplies”.  This meant that Chester Zoo were able to recover roughly £1million in associated VAT!  Others operating in the voluntary and charity sector may be unaware of the implications of VAT, and that there are benefits and concessions available which can save on unnecessary expenditure.

Operators of heritage railways museums and collections, for example, need to be aware of the general VAT liability rules that would apply to their activities, and also may be able to benefit from the VAT legislation that applies to charities and other non-profit making organisations, such as VAT on advertising costs and admission charges.  There are several concessions that apply in the charity sector that allow suppliers to remove the positive VAT charge, and also the increased use of trading arms for charities and voluntary organisations can provide a useful benefit in ‘ring-fencing’ the VAT and minimising its impact without impinging on the core charitable activity. In addition many charity and voluntary organisations have been caught out by differing interpretations of income long defined as ‘grants’ which have subsequently been found to be contractual engagements. Rather than ignoring the income from a VAT perspective many have found that VAT applies, and have had to take drastic action as a result. Recent VAT tribunal cases have highlighted this as an area worthy of review and assurance from both a legal, contractual point of view as well as the potential charge to VAT.

Any organisation making taxable (VATable) supplies that exceed the VAT registration threshold (currently £82,000 per annum) will be compulsorily required to register for VAT, regardless of whether they are a charity or not. Obviously there are restrictions on how much ‘trading’ a charity can have, and so there may be restructuring required to take this into account and deal with trading income.  Pushing aside for one moment the administrative and record-keeping requirements that accompany a VAT registration, many organisations may be able to use the VAT system to their advantage and legitimately recover VAT on expenditure or avoid having to pay it in the first place.   Burgess Hodgson Indirect Tax Services would be happy to hear from any organisations in the charity sector – especially zoos! – requiring assistance and assurance in terms of their VAT and general tax obligations