The rise in VAT from 17.5% to 20% will see the charitable sector lose £140m on top of £1bn it already pays in VAT. For individual charities this means 2.5% less funds to work with in 2011 than in 2010.
Neil Beck of Wellers Accountants says: “Charities are among the hidden victims of the VAT rise and need to review their VAT status to mitigate the impact. In some cases charities may be able to become partially exempt from VAT – which means that they may be able to recover some of the VAT they incur.
“For example, there are a number of activities which need not have VAT charged on them, provided that a charity is performing the activity.
“Charity income is governed by a number of rules depending upon the type of income received so making sure money is accounted for at the correct rate will also be key.
“Isolation of the particular areas of trade within the charity is important to assess whether registration is required and whether reclaims could be made under the partial exemption calculations. This will enable charities to take full advantage of zero rated reliefs on certain expenditure and it may also be worthwhile carrying out a review of systems as well as reviewing the method by which VAT recovery is calculated. It is worth remembering that there is no single method of apportioning costs in relation to non-business activities and this may be the time to consider an alternative method to the one currently in use.
“For most charities however, the higher VAT will sadly mean tighter budgets and so there will be increased pressure, in an already harsh climate for fund raising plus low interest rates on deposits, trying to raise more money to overcome the impact of the higher rate”
Visit www.wellersaccountants.co.uk for more information and advice.