This page contains information that has appeared on Sandy Adirondack's legal update website for voluntary organisations at www.sandy-a.co.uk/legal.htm. For current updates, including potential changes that are in the pipeline, see the legal update website.

These websites for each chapter update the 3rd edition of The Russell-Cooke Voluntary Sector Legal Handbook by James Sinclair Taylor and the Charity Team at Russell-Cooke Solicitors, edited by Sandy Adirondack (Directory of Social Change, 2009). The websites are not intended as a comprehensive update and should not be treated as such.

To order a copy of The Russell-Cooke Voluntary Sector Legal Handbook, print out the order form at www.sandy-a.co.uk/bookserv.htm or send an email order by clicking . It costs £60 for voluntary organisations or £90 for others, plus 10% p&p.

Chapter 57
VALUE ADDED TAX

VAT RATES AND THRESHOLDS

Updated 3/1/11. This information updates ss.57.2.1 & 57.8.2 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
From 4 January 2011 the standard rate of VAT went up from 17.5% to 20%. Organisations which cannot recover VAT will end up paying an extra 2.5% on standard-rated goods and services.

Organisations which are registered for VAT must have systems and procedures in place to charge 20% VAT on standard-rated goods and services provided on or after 4 January. Organisations which use the VAT fraction of 7/47 to calculate VAT must from 4 January use the new fraction 1/6.

Guidance on how to deal with goods or services supplied before 4 January but invoiced after that date, continuous supplies of services, the flat rate scheme, the monthly payments on account scheme, and other specific issues is available via tinyurl.com/35cosc8.

HMRC's detailed guidance, via tinyurl.com/m7so28 covers, amongst other topics, how to deal with subscriptions to clubs and associations where the membership year spans 4 January 2011 (s.9.3), fuel scale charges (s.7.1) and partial exemption (s.7.2).

Zero-rated, reduced-rated or exempt supplies are not affected by the increase in standard rate.

From 1 April 2010 the VAT registration threshold was increased from £68,000 to £70,000 in any 12-month period, and the deregistration threshold went up from £66,000 to £68,000.

VAT WRONGDOING PENALTY

Added 20/4/10. This information updates s.57.3 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
From 1 April 2010 anyone issuing an invoice that includes VAT, when they are not registered for VAT or are not entitled to charge it for another reason, will be subject to a new VAT wrongdoing penalty. The penalty is a percentage of the amount charged as VAT on an unauthorised invoice. Information about the wrongdoing penalty is at tinyurl.com/ya5l3ur.

VAT ON EDUCATION AND TRAINING

Added 20/4/10. This information updates s.57.10.6 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
From 1 April 2010 the provision of education and vocational training that is ultimately funded by the Young People's Learning Agency and the Skills Funding Agency is exempt from VAT. This continues the exemption that applied to training funded by the Learning and Skills Council.

From 11 March 2010, the VAT treatment of education and vocational training provided by a subsidiary trading company owned or controlled by a university is treated as exempt, in the same way that education or training provided by the university itself would be exempt. This change applies only to companies that are owned or controlled by a university, provide university-level education leading to a qualification awarded by a university or a nationally recognised body, and have close academic links with their parent university.

Details of the new provisions for university subsidiary trading companies are in Revenue & Customs brief 09/10 at www.hmrc.gov.uk/briefs/vat/brief0910.htm and VAT information sheet 03/10 at tinyurl.com/y2lo9dp.

VAT AND PAY-PER-CLICK SPONSORED LINKS

Added 3/1/11. This information updates s.57.12.1 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
VAT zero rating applies to all advertisements placed by a charity in any media and services connected with the design and production of the advertisement, but only if the advertising is in the someone else's — not the charity's — publication, website, time or space. HMRC's view in the past was that pay-per-click (PPC) sponsored links on search engine websites were not eligible for zero rating, because they linked through to the charity's own website. In June 2010 HMRC revised its approach, and said that such links, along with associated copywriting and design services, are eligible for zero rating when supplied to a charity. Details are in HMRC brief 25/10 at www.hmrc.gov.uk/briefs/vat/brief2510.htm.

Search engine optimisation services provided by copywriters and designers (structuring a website so that it contains as many keywords as possible) remain standard rated, because HMRC considers that the purpose of these is to optimise the charity’s own website.

VAT AND JOINT CONTRACTS OF EMPLOYMENT

Added 3/1/11. This information updates s.57.13.1 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
Where an employee is employed by two organisations (for example a charity and its trading company) on a joint contract of employment, but one organisation pays the employee and recharges the other organisation for its share of salary and linked costs such as tax and national insurance, the recharge for salary etc is outside the scope of VAT, so VAT does not have to be charged on it. (However, if a management fee is charged, this is subject to VAT at standard rate.)

A recent case involving IT workers showed that even where employees are hired on joint contracts of employment, VAT may in some cases be payable on the salary recharge. In CGI Group (Europe) Ltd v HMRC, the upper tribunal (finance and tax) found that the charge by one employer to the other was not actually a recharge for salary costs, but was a charge for the supply of IT services — which are subject to VAT.

The decision is at www.bailii.org/uk/cases/UKFTT/TC/2010/TC00678.html.
This was a complicated case, in which Cox Services Ltd, an insurance company, outsourced its IT department to CGI Group. Cox's employees transferred to CGI under TUPE (the transfer of undertakings regulations), but CGI immediately offered — and the employees accepted — joint contracts of employment with both CGI and Cox. CGI and Cox had a detailed service agreement for the work to be done, and how it would be charged. CGI paid the employees' salaries and recharged Cox. The tribunal agreed that there were joint contracts of employment but despite this, the agreement between CGI and Cox was a contract under which CGI provided IT services to Cox — and these services were subject to VAT.

Where an employee on a joint contract genuinely works for both organisations and is managed by each for the work done for it, a salary recharge by one organisation to the other is outside the scope of VAT. But where one of the employers manages the employee not only for its own work but also for the work of the other employer, or where the two employers have an agreement under which the joint employee will while working for one employer supply services to the other, VAT may be an issue. Organisations which may be in this or a similar situation should take advice from their solicitor or accountant.

Information about VAT on the supply of staff, including secondments and staff on joint contracts, is in HMRC notice 700/34 via tinyurl.com/3x2ubhl.

VAT AND POSTAL SERVICES

Added 3/1/11. This information updates s.57.13.2 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
From 31 January 2011 some postal services provided by Royal Mail will become standard rated for VAT. The public postal service, and goods and services which the Royal Mail has a statutory duty to provide (including providing postal facilities to private postal providers) remain exempt from VAT. But other Royal Mail services will become subject to VAT, including door-to-door unaddressed mail, Parcelforce, 9 a.m. special delivery (but not next-day special delivery), mailroom services, and services provided on terms and conditions negotiated with a customer. Organisations which have bulk postal agreements with Royal Mail or other providers may lose their exemption.

Organisations which may be affected by this change should read the HMRC technical notice on postal services, available via tinyurl.com/272285l, and take advice from a solicitor or accountant.

On the positive side, organisations with individually negotiated agreements with the Royal Mail may be able to claim repayment of VAT back to 1 April 2006. Even though VAT was not charged, it may be possible to deem the agreed price as having been VAT inclusive. Details are in HMRC brief 19/10 at www.hmrc.gov.uk/briefs/vat/brief1910.htm.

VAT AND INVESTMENT MANAGEMENT FEES

Added 3/1/11. This information updates s.57.13.4 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
Charities registered for VAT may be able to reclaim some VAT on investment management fees. In a test case brought by the Nuffield Foundation, HMRC said in 2009 that charities can recover — both retrospectively and in future — the portion of the fee that relates to investment income used for the charity's activities which are subject to VAT. The fee on the portion of investment income used for exempt activities is not recoverable. Where restricted or endowment funds that can only be used for specific purposes are invested, VAT can be recovered only in relation to activities subject to VAT which are permitted within the restricted purposes.

HMRC said in November 2009 that it would issue a briefing explaining this change, but as of early January 2011 I have not been able to find anything on its website or in any relevant publication. Organisations which want to take advantage of this change should take advice from a solicitor or accountant.

ZERO RATING ON NEW CHARITY OR RESIDENTIAL BUILDINGS

Added 3/1/11. This information updates s.57.14.1 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
Where a new self-contained building will be used for a "relevant residential purpose" or "relevant charitable purpose" as defined under VAT law, VAT zero rating is available for services purchased in the course of construction (but not the separate services of architects, surveyors or persons acting as consultants or in a supervisory capacity); materials, hardware and other goods provided as part of the zero-rated services; and the sale of the freehold or the grant of a lease for a period exceeding 21 years.

Zero rating was available until 30 June 2010 even if the building was partly used for purposes that were not relevant charitable purposes, provided that at least 90% of the building was used solely for relevant residential or charitable purposes, and provided that by 1 January 2011 either the building was constructed to a point above foundation level, or the charity was in occupation of the building if it was being acquired or leased. From 1 July 2010, or where the 1 January 2011 rules have not been met, the 90% proportion is increased to 95%.

Information about these changes is in HMRC briefs 26/10, 32/10 (an updated version of 39/09) and 33/10, at www.hmrc.gov.uk/briefs/vat/brief2610.htm, www.hmrc.gov.uk/briefs/vat/brief3210.htm and www.hmrc.gov.uk/briefs/vat/brief3310.htm.

VAT ON RENT

Added 20/4/10. This information updates s.57.15.3 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
Rent is generally exempt from VAT, but a landlord or property owner can choose to charge VAT on rent. This is called the option to tax. If an option to tax is in place, all supplies relating to those premises, including their construction or sale, are standard rated rather than exempt.

From 1 April 2010 and 1 May 2010 some of the rules on opting to tax and on revoking the option are changed, including new conditions for revoking an option to tax within the six-month cooling off period. [Note that the cooling off period is incorrectly given as three months in The Russell-Cooke Voluntary Sector Legal Handbook s.57.15.3.]

Basic rules on the option to tax are in HMRC VAT notice 742A (tinyurl.com/3g32uz). The April and May changes are in HMRC brief 08/10 (www.hmrc.gov.uk/briefs/vat/brief0810.htm) and VAT information sheets 02/10 (tinyurl.com/y45wbvb) and 08/10 (tinyurl.com/yyr7gnk).

Special rules allow charities, prior to entering into an agreement for the supply of premises where an option to tax is in place, to apply for disapplication (cancellation) of the option to tax. Charities can do this only in relation to non-office premises used for relevant charitable purposes (which are defined narrowly in VAT legislation).

Under new rules announced by HMRC in July 2010, where a building or part of a building is to be used 95% of more for relevant charitable purposes, the customer and supplier can agree that the option to tax will be excluded where:

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