14 July 2010
Value Added Tax, or VAT... The very mention tends to fill our register members with dread, and few dwell on this area for longer than is strictly necessary. The chancellor George Osborne set out in his budget announced 22nd June 2010 plans to increase the standard rate of VAT from 17.5% to 20%. This proposal was voted through by Parliament yesterday. The new rate will be introduced on 4th January 2011. Since this widely predicted announcement, the media has been awash with speculation and analysis concerning the potential impact of the increase on different sectors of society. Following much debate on the issue, we consider the practical implication for third sector organisations.
In anticipation of the Chancellor’s increase the Charity Tax Group (CTG), a membership organisation focusing on tax matters and reform in the charity sector, undertook research into the potential impact of the proposed increase across a focus group of its members. CTG estimates that “the increase in the standard rate of VAT from 17.5% to 20% from 4 January 2011 will increase the irrecoverable VAT burden of charities by at least £150 million per year”. Estimates of the total irrecoverable VAT payable by the sector could be as much as £1.5billion.
So will your organisation’s property costs be affected by the VAT increase, and are there measures you can take to minimise its impact? Should you be paying VAT at all on your property expenditure? It is certainly worth clarifying your position, as the potential savings can be dramatic.
Impact on Rent:
Don’t just rely on your landlord, be pro-active and investigate your position. Landlords and their agents can often make mistakes and incorrectly demand VAT where none is payable. Confirm with your landlord whether the property is opted for VAT, then dig out your old rent invoices and establish whether you are being charged. If the property is not opted, no VAT should be payable on your rent. If you are a charity, could you be claiming relief on your rent for carrying out a “relative charitable purpose” under the VAT Act 1994? To benefit from this relief, you will need to serve a certificate of relevant charitable use on the landlord. If you are a social enterprise business, should you be considering whether it would be cost effective to register for VAT?
Impact on Service Charge:
Contractors often charge VAT on the services provided to a building. From cleaning and utilities to managing agents and surveyors, invoices payable via the service charge will include an element of VAT. If your property is not opted for VAT, these costs will be irrecoverable and will be passed on to you as their tenants! Therefore your service charge payments may increase. Again, find out from your landlord if your property is opted for VAT. If the property is not opted, expect increased quarterly charges and a final demand at the end of the year once the actual building expenditure has been finalised. If the building is opted for VAT, as with your rent if you cannot recover VAT your costs will increase.
Social Landlords:
If you are a social landlord, are you prepared for the upcoming VAT change? Service charge budgets are generally set annually in advance. Be sure to factor in potential additional supplier costs. Failure to account for this may lead to a service charge deficit, which you as landlord must fund until demands are made of the your tenants at the end of the building’s service charge year.
These are just some of the issues to which the change in VAT may give rise. The area remains a complex and often bewildering area for both charities and social enterprises alike. If in doubt, seek further advice.
For further information on this topic, click here to view James McCallum’s excellent and informative article written for Third Sector summarising some of the legal issues relating to potential charity exposure to VAT. If you have any questions regarding the next steps in investigating your VAT status, please contact the Ethical Property Foundation’s Property Advice Team.