VAT issues for charities and not-for-profits - trying to get certainty

All we want from tax is fairness and certainty. This does sometimes feel difficult to achieve. As advisers, what we see is a front of mind awareness from charity and not for profit clients in respect of VAT – it is a cost, and a confusing and difficult commercial and accounting issue. If you get it wrong you lose the VAT, upsetting budgets, then very likely a document from HMRC setting out your Human Rights as you are looking at a penalty.  

Unfairly, this is a bigger risk area for charities and not for profit organisations than it is for a commercial business who accounts for VAT as a ‘simple tax’ – VAT due on sales, VAT fully recoverable. For charities and not for profits, VAT can be far more complex. 

HMRC offer support through their publications, online guidance and an enquiry or clearance ‘service’. This may work, it may not. Our experience is it has become difficult to secure a clear ruling, as HMRC decline to do so if there is any guidance on the public domain, however remote the guidance and complex the transaction. This has ‘backfired’ for HMRC in the courts where it appears to have been acknowledged that this policy means they cannot, or should not, levy a penalty when the taxpayer has actually asked the question and HMRC not properly addressed the issue.

This does raise the principle of estoppel not generally available against the Crown. This in contract law provides a form of protection albeit as a shield not a sword. This general fairness principle is now applied in tax as legitimate expectation. This replaced the parliamentary principle of misdirection established in 1977 by Robert Sheldon (the Sheldon doctrine). If you were told by officials you should do it this way, you could not be penalised for following that guidance. The principle of legitimate expectation ‘feels’ less generous and according to counsel hard to prove and difficult to rely on.

So what do you do?

Our advice is to always contact HMRC if there is any uncertainty. They will not provide advice to mitigate costs – that is your advisor’s role – but they may give you their view of the tax consequences of the arrangements. This may not provide complete protection, but it may alert you to a problem and may provide a defence during a subsequent inspection or review. Be careful what you say – there must be full disclosure, but it must be accurate and as an organisation you should make your best case.

It is HMRC’s reluctance to provide a clear ruling that prompted this article. It is frustrating and feels like a counter-productive behaviour for a revenue authority. It becomes a percentage game in respect of the most likely treatment, rather than an agreed treatment providing certainty.