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Charity Tax Changes

on Tuesday, 30 January 2018.

There have been several recent tax developments affecting charities. We have compiled a summary of the tax news that trustees should be aware of.

Charities Face Extra Costs from Digital Tax Returns

All charities with an income of over £85,000 will have to file digital VAT returns from April 2019 as part of HMRC's Making Tax Digital (MTD) agenda. It has been reported that this is likely to cost the sector several million pounds.

The government had announced in early 2017 that charities would be exempt from its MTD scheme, although any trading subsidiaries would not. However, according to the Charity Tax Group, HMRC said in a recent meeting that this exemption only applies to corporation tax, not VAT returns.

Charities will have to purchase software in order to comply. This is not yet available and HMRC has not yet given any indication of how much it might cost.

Autumn Budget 2017: Government Freezes VAT Threshold and Decides to Consult

The Office for Tax Simplification (OTS) presented a report to Parliament recommending a comprehensive review of VAT reduced rate, zero-rate and exemption schedules, prompting concern from charity representatives.

Following this report, the government announced in its Autumn Budget that it will consult on the design of the VAT registration threshold of £85,000 (VAT taxable turnover), which the OTS reports is "one of the highest levels in the world". In the meantime, the threshold will stay at £85,000 for the next two years from April 2018.

Currently around 40,000 charities are VAT-registered, meaning they are entitled to reclaim VAT on purchases that they use for business purposes, but they must charge VAT on services they provide. Charities currently pay around £1.5bn in VAT which they cannot recover. The government is likely to consult on changes to a number of existing VAT reliefs, and charities are hoping to win special status for the sector on VAT registration.

Autumn Budget 2017: Simplifying the Gift Aid Donor Benefits Rules

Following the announcement in the Autumn Budget that the rules on the level of benefit that charities can offer to donors and still claim Gift Aid will be simplified from April 2019, HMRC has published its final response to the consultation.

It was announced that the current three threshold system governing how much benefit donors can receive from charities before their donations are no longer eligible for Gift Aid will be reduced to a two threshold system. The new limits will mean that charities can provide 25% benefit for the first £100 of the donation, then 5% of the total above that, up to the maximum benefit of £2,500. Plans to introduce a low value benefits disregard have been dropped.

The government will also legislate the effect of four extra-statutory concessions currently operated by HMRC that enable charities to provide benefits above and beyond the strict limits set out in the donor benefit rules. 

Autumn Budget 2017: Changes to Handling of Business Rates

A change in the way the government handles business rates was also announced in the Autumn Budget. The new trial system will allow local authorities to retain what they collect, as opposed to redistributing rates across the UK. It has been reported that this could increase the business rates bill for charities by £43 million.

Charities currently receive 80% mandatory relief on business rates on property used wholly or mainly for charitable purposes. Local authorities are also entitled to provide a further 20% discretionary relief on the remainder. Concerns have previously been raised by the Charity Tax Group and Charity Finance Group over whether this proposed change will encourage local authorities to scrap discretionary rate relief.

Charity Tax System to be Reviewed by New Commissioners

The National Council for Voluntary Organisations has announced that it has established a new team of commissioners to undertake a comprehensive review of the charity tax system, which has not undergone a full review since 1997. Led by the former Chairman of the Inland Revenue, Sir Nicholas Montagu, the commission will review existing charitable reliefs and make recommendations to the government as to how such reliefs might more effectively achieve their intended public benefits and to reflect the evolution in the charity sector. The commission aims to complete its work within 18 months and its conclusions will assist the Inquiry into the Future of Civil Society, which is due to close in 2019.

For more information, please contact Adam Quint in our Charity Law team on 0117 314 5248.

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