HMRC notices to charities on compliance

Carolyn O'Shea and Grace Thompson discuss how HMRC is issuing one-to-many notices to charities regarding input tax apportionment and recovery.

‘One-to-many’ notices or ‘nudge letters’ are a standardised message sent by HMRC to organisations within a particular industry, to remind them of compliance obligations and provide guidance on areas with higher risk of non-compliance. HMRC will generally issue these notices when officers experience high levels of non-compliance around a particular issue or area of tax.

We have been made aware that HMRC is issuing a short email to VAT-registered charities, philanthropic and voluntary bodies, and other not-for-profit organisations, with a turnover of less than £2million. The aim of the email is to raise awareness to the sector about its obligation to complete business/non-business apportionment calculations for input tax recovery.

The email is intended to be educational and provides links to sources of guidance, as well as explaining how failing to do these calculations may have led to historical overclaims of input tax.

Please find a copy of the email.

Why do charities need to complete business/non-business apportionment calculations?

VAT incurred on purchases of goods or services can only be treated as input tax and reclaimed from HMRC if those goods or services are intended to be used for taxable business purposes. The general rule is VAT incurred on costs relating to non business activities is not recoverable.

If your charity makes both business and non business supplies, the VAT you can reclaim as input tax needs to be apportioned.

What are business and non-business activities?

In 2022, HMRC published a Revenue and Customs brief providing the tests organisations should conduct to determine if the supply is a business activity. The two stages are:

1. Stage 1 - The activity results in a supply of goods or services for consideration
   An activity that does not involve the making of supplies for consideration cannot be a business activity for VAT purposes.
2. Stage 2 - The supply is made for the purpose of obtaining income therefrom (remuneration)
   Even if the charge is below cost.

You can read more about these tests in our previous insight.

How are business/non-business calculations done?

Once you have worked out which of your activities are business and which are non-business, you will need to identify which purchases you can wholly attribute to your business and non-business activities. The VAT on purchases relating wholly to business activities can be recovered as input tax(subject to usual input tax guidelines), whilst the VAT on purchases relating wholly to non-business activities cannot.

The VAT on remaining purchases, which can be attributed to both business and non-business uses, must then be apportioned and only the apportioned amount may be recovered. This may include, for example, professional fees or other overhead costs which relate to both business and non-business activities.

There is no set method for apportionment, but the method you choose must give a fair and reasonable reflection of the business/non-business split of your income.