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December 2023

charity vat guide

Charity VAT – a Myriad of Complex Rules

By Customs Duty news|Featured|Uncategorized|VAT news, Customs Duty news|VAT news, VAT news

Charities face some of the most complex rules whilst trying to adhere to the principle of minimising staff and professional advisory costs.  This means they often do not have the knowledge needed in-house to understand the VAT charity rules impacting them

This article aims to provide a comprehensive overview of VAT and its impact on charities.

 

VAT Basics – Context for Charities

VAT operates on the principle of taxing the value added to a product or service at each stage of the supply chain and generally speaking businesses pay VAT on revenues and reclaim VAT on business costs.  Consumers on the other hand pay VAT on goods and services they purchase but cannot get a credit for this VAT and therefore bear the burden of VAT.  Not-for-profit organisations such as charities sit somewhere in between the two and in relation to most of their activities also bear the cost of VAT – this is because they generally aren’t required to account for VAT on their revenues as a result of applicable VAT reliefs for charities.  For example  they typically receive donations and funding.  The downside of this is that a proportion of the VAT they incur on costs cannot be recovered.  In this article we will set out some of the key VAT charity considerations.

 

Charity VAT Exemptions and Reliefs

Charities often benefit from VAT exemptions or reliefs on certain goods and services, both in terms of their revenues and the costs they incur.  The logic here is that charities provide a  benefit to society and as a result are granted relief from paying VAT on specific activities.  However it is important to bear in mind that there is no blanket VAT relief for charities – the charity VAT reliefs are activity/cost specific, and therefore it is vital that charities understand the reliefs available to them and the eligibility criteria.

 

Charity VAT Reliefs – Eligibility Criteria

The conditions attached to VAT exemptions or reliefs vary and can be complex.  In terms of basic conditions, these would include being a registered charitable organisation and using funds for charitable purposes to qualify for these reliefs.  Beyond this the criteria are specific to the activity.  For example there are conditions attached to VAT exempt fund raising events – a charity can only run 15 such events per financial year in the same location so as to prevent distortion of competition with commercial organisations.  If there are more than 15 events in the same location, all of the events become subject to VAT rather than just the 16th and further events.  Even within this prescriptive rule there are nuances to be understood.  Smaller scale fundraising events such as coffee mornings can be exempt from the ‘15’ rule if they raise less than £1000 per week.

Business Activities

In addition to having charitable fund raising activities charities will also frequently have commercial activities such as selling goods and services (for example entrance to premises/gardens or the sale of Christmas cards). Where these are similar to goods and services offered by commercial organisations, the VAT treatment of these activities depends upon the nature of the goods or services provided.  Having commercial activities may mean that the charity has to account for VAT on revenues but the upside is increased VAT recovery on costs.  Charities often establish a trading subsidiary to carry out these activities as they may not be permitted to have such activities running through the charity under the terms of their charitable status.   This adds a further layer of VAT complexity as the charity is then managing 2 separate organisations from a VAT perspective, although it may be possible to apply to have a VAT group so there is only one VAT registration, and more importantly VAT is not charged on charges between the two for staff or back office costs.

Fundraising Events

Charities undertake a range of fund raising activities with differing VAT treatments such as ticket sales for fundraising events, donations and other related revenue streams.  As set out above, it is vital that the conditions attached to the VAT reliefs are understood by the charity so they can ensure that they take advantage of these wherever possible.

Donations and  VAT

Donations are outside the scope of VAT (ie no VAT needs be accounted for on them) provided they are ‘freely given’.  This means the donor does not receive anything from the charity in return for the donation. It is important that any publicity material/website narrative and associated processes are accurate in making it clear the donation is voluntary.  For example for a charity fundraising event, if a charity chooses to request a voluntary donation rather than charge a fixed fee for entrance, the donation amount can still be treated as VAT free provided it is genuinely freely given.  This means the donor is still able to gain entrance to the event regardless of whether they do in fact make a donation.    If the process for obtaining entrance is by ticket and this is arranged online, it is important that the website allows the ‘donor’ to progress to obtaining a ticket even if they do not donate or if they only donate a nominal amount. This applies even if an appropriate donation value is suggested.

International Operations

Charities operating internationally may encounter additional challenges related to VAT as each country may have its own rules and regulations.  Cross-border transactions can trigger VAT obligations and charities need to navigate these complexities carefully so as to minimise the cost of VAT and of overseas VAT registrations

 

VAT and Charities – Best practice

Record Keeping

Maintaining accurate records of income and expenses transactions is essential for proper VAT compliance.  Valid VAT invoices in the name of the charity should be retained to support any VAT recovery permitted .  In addition any supporting evidence relating to reliefs should be retained.   Robust record keeping helps minimise the risk of errors being made in relation to VAT and also helps reduce challenges during HMRC VAT audits

Partial Exemption

Given the range of activities, charities need a way of determining how much VAT they can recover on costs.  In simple terms, depending on the precise nature of the activities, this will likely involve firstly carrying out a ‘business/non-business’ calculation to determine how VAT recovery on cost is to be disallowed on the basis it relates to non business income such as donations.  The remaining VAT is then carried forward to the partial exemption calculation where recoverable VAT is calculated based on the ratio of taxable to exempt revenues.  This is a complex area.

Professional Advice

Given the complexity of VAT rules for charities, seeking professional advice from VAT specialists can be invaluable for charities.  Specialists with expertise in both VAT and the charity sector can provide tailored guidance and help ensure the VAT position of the charity is optimised, ultimately benefiting the amount of benefit the charity can generate for good causes.  The VAT Consultancy can partner with charities on this journey and we are well placed to simplify the complexity for you.

 

Conclusion

Navigating the crossover between VAT and charitable activities requires a detailed understanding of VAT rules and also the associated compliance obligations.  Charities must proactively manage their VAT responsibilities to ensure the efficient use of resources by staying informed, seeking professional VAT advice and implementing effective processes to manage VAT risk.  Charities can then optimise their position and continue to make a positive impact on society without VAT negatively impacting their charitable aims.

The VAT Consultancy is highly experienced and provides relevant and practical advice to help you deal with the VAT and customs duty issues your organisation faces.  We provide global VAT and customs duty advice and VAT compliance services.  To discuss how we can help contact us today.

 

 

 

 

 

 

 

 

 

The Vat consultants london

Navigating the Tour Operator’s Margin Scheme (TOMS) VAT in the UK

By Customs Duty news|Featured|Uncategorized|VAT news, Uncategorized|VAT news, VAT news

At The VAT Consultancy, we recognise that the travel industry has a plethora of complex VAT rules to get to grips with, not least the nuanced framework of the Tour Operator’s Margin Scheme (TOMS).  This can be a daunting challenge for businesses in the travel and tourism sector. As your dedicated VAT partner, we can guide you through the intricacies of TOMS, offering bespoke solutions that align seamlessly with the specific needs of your business.

 

Understanding Your TOMS Journey

Navigating TOMS VAT requires a keen understanding of the ever-evolving rules that govern the travel industry. Our team at The VAT Consultancy not only has significant expertise from providing VAT travel advice to the sector since the mid 1990s, but also has the commitment to providing you with the insights needed to traverse this complex landscape with confidence.

Tailored Solutions for Your Business:

We understand that every business within the travel sector is distinctive in its operations.  Our commercial understanding of these variations gained over the years of providing TOMS and other VAT travel advice means we are well placed to provide you with advice that is appropriate to your specific activities.   Our approach involves crafting customised solutions that specifically address the challenges and opportunities presented by TOMS and other VAT rules relevant to the travel sector, ensuring your business is not only compliant but strategically positioned for growth.  From providing expert guidance on VAT calculations to offering proactive insights that enable you to eliminate any unnecessary VAT costs, The VAT Consultancy is here to support your business at every step.

 

Navigating the Tour Operator’s Margin Scheme (TOMS)

Join us as we delve into the intricacies of TOMS VAT, ensuring that your business is not only compliant but well-positioned for success in the dynamic world of travel and tourism. Contact The VAT Consultancy today– where expertise meets excellence in VAT navigation.

 

What is TOMS VAT?

The Tour Operator’s Margin Scheme (TOMS) is a unique VAT accounting mechanism designed for certain businesses operating within the travel industry. Its primary goal is to simplify the VAT process for tour operators by standardising the treatment of VAT on certain supplies and services.  Since Brexit UK tour operators face revised rules whilst EU established tour operators continue to benefit from the is simplification which reduces the number of overseas VAT registrations required.

 

Businesses Affected by TOMS VAT

The Tour Operator’s Margin Scheme (TOMS) VAT has a far-reaching impact on businesses within the travel and tourism sector. The scheme applies to a range of enterprises involved in the supply of travel services.  The following businesses are typically required to use TOMS:

Tour Operators:

Tour operators are at the forefront of businesses impacted by TOMS VAT.  Whether organising package holidays, group tours, or providing guided excursions, EU and UK tour operators must adhere to the TOMS framework in their VAT accounting.  For VAT, ‘tour operator’ is the term used to describe a business selling travel arrangements in its own name, where these have been sourced from 3rd party suppliers and are on sold either as standalone components or as a package.

Travel Agents:

If selling in their own name, travel agencies selling travel packages, whether online or through traditional channels, can fall under the purview of TOMS.  NB TOMS doesn’t apply to travel agents acting as intermediaries arranging the sale of travel arrangements by someone else.  They therefore need to be able to distinguish between the two when they act in both capacities.

Travel Organisers:

Entities responsible for coordinating and arranging travel services, such as planning itineraries, securing accommodations, and managing transportation, can also be subject to TOMS if selling in their own name. This category includes businesses specialising in event travel planning.

Event Organisers:

Businesses organising events that involve travel services, such as conferences, seminars, or incentive trips, may be affected by TOMS. The scheme considers the travel-related aspects of these events when determining VAT liabilities.

Accommodation Providers in Certain Cases:

While not all accommodation providers are subject to TOMS, those offering accommodation they have sourced from 3rd parties and are selling in their own name either as a standalone or as part of a package deal may fall under its scope. 6

Passenger Transport Providers:

Businesses selling passenger transport services they have bought in, such as airlines, cruise lines, and coach operators, are within the ambit of TOMS. The scheme includes the transportation component of a travel package when calculating VAT liabilities.

 

Supplies Covered by TOMS

The Tour Operator Margin Scheme (TOMS) applies when certain travel services (known as ‘margin scheme supplies’) are bought in from a third party and on sold without the components being changed (known as ‘materially altered’):

  • Margin scheme supplies – this includes the following:
    • Accommodation
    • Passenger transport
    • Airline lounges
    • Travel guides
    • Hire of means of transport
    • Trips and Excursions
    • Catering, admission tickets and sports facilities but only when packaged with one of the above.
  • Without Material Alteration – this means the travel components are on sold without being changed. For example, the hire of a means of transport does not have a driver and fuel added to it to change it to passenger transport.  Material alteration would include for example buying in hotel accommodation for a season and adding catering staff to provide catered accommodation.

To fall under the Tour Operator’s Margin Scheme (TOMS) it is not necessary for a package to be created – the individual margin scheme components listed above can be sold as standalone travel services and still fall with TOMS.

Understanding the specific supplies covered by TOMS is crucial for businesses to accurately calculate their VAT liabilities. While the scheme simplifies the process by focusing on the margin, businesses must carefully identify and account for each eligible supply to ensure compliance with TOMS regulations. Additionally, keeping abreast of any updates or changes in the VAT treatment of specific supplies is essential for businesses navigating the intricacies of TOMS.

 

How TOMS Works

TOMS is an EU VAT scheme but the UK adopted a form of TOMS following Brexit, with many aspects of the EU rules being retained.  However, some key changes were made, so that UK TOMS VAT is only due on the standard rated (eg accommodation) element of the margin for UK travel (no UK VAT is due on the zero rated elements such as passenger transport or on non UK travel).

Basic Mechanism:

TOMS operates on a margin-based system, focusing on the difference between the buying and selling prices of travel services in the VAT return period (as opposed to being calculated on each individual sale). Instead of applying VAT to the entire selling price, VAT is calculated only from the profit margin made by the business.

Calculating the Margin:

The margin is calculated by deducting the VAT inclusive cost of certain goods and services directly related to the travel package from the total selling price. These costs typically include accommodation, certain passenger transport services, and other directly attributable costs.  Overhead costs are not included in the calculation.

VAT Calculation:

VAT is then calculated from this margin which is treated as being inclusive of standard rated VAT (although for UK TOMS calculation there is now the ability to apportion the margin so VAT is not paid on the zero rated elements eg passenger transport).  As the calculation is done each VAT return period, with an annual true up also being done, this approach streamlines the VAT accounting process for tour operators.

 

Benefits of TOMS

It is fair to say that TOMS has a reputation for being complex, likely due to the fact the VAT due is calculated on a different basis to usual.  However, there are numerous benefits to using TOMS as opposed to the normal VAT rules although it is important to bear in mind that TOMS is not optional, generally speaking businesses cannot choose between TOMS and the normal VAT rules:

Reduced Overseas VAT Compliance Costs

The EU TOMS scheme was devised to reduce the number of overseas VAT registrations tour operators would otherwise need if they sell travel arrangements taking place within the EU.  For example hotel accommodation is subject to VAT where the hotel is located, so without TOMS a tour operator would need to register for VAT in each country in which its travel takes place and would account for VAT under the normal VAT rules, recovering VAT on the hotel cost and paying VAT on the sale of the hotel accommodation. Multiple VAT registrations create a significant cost for businesses.  With TOMS the VAT is paid at the rate in the country the business is established in.

Simplified VAT Accounting:

TOMS alleviates the administrative burden associated with calculating VAT on individual components of a travel package. Businesses benefit from a simplified accounting process, reducing the likelihood of errors on individual transactions.

 

Disadvantages of TOMS

Complexity of Compliance:

While TOMS simplifies certain aspects of VAT accounting, it introduces complexity in terms of understanding the eligible costs and ensuring accurate calculations, particularly if the business has other non TOMS activities.  The TOMS rules demand a thorough understanding of the scheme’s intricacies.

VAT due on Zero Rated Passenger Transport:

Under TOMS VAT is due on the full margin, meaning any zero rated passenger transport elements such as flights, trains etc are taxed when they otherwise wouldn’t be under the normal VAT rules.  In addition there is no VAT on the cost of buying in passenger transport which increases the margin and therefore the VAT due.

VAT Invoices

VAT invoices cannot be provided to customers for TOMS supplies.  Ordinarily this doesn’t matter when customers are private individuals, but in some cases TOMS travel arrangements may be sold to businesses and they will be unable to recover the VAT accounted for by the tour operator, increasing the cost.

 

Navigating TOMS with The VAT Consultancy

At The VAT Consultancy, we understand the intricacies of TOMS and the impact it can have on your business.   We can help you navigate this complex landscape with confidence.

Expert Guidance for TOMS Compliance:

The VAT Consultancy brings a wealth of expertise to the table, offering bespoke solutions and services tailored to the specific needs of your business. Our team of seasoned professionals is well-versed in TOMS VAT regulations, ensuring that your VAT accounting aligns seamlessly with the requirements of this specialised scheme.

Mitigating Challenges, Maximising Benefits:

While TOMS introduces challenges, it also presents opportunities for businesses to streamline their VAT processes. The VAT Consultancy is here to guide you through the complexities, helping you mitigate challenges and maximise the benefits that TOMS offers to your enterprise.

Your Partner in TOMS Compliance:

As your trusted partner in TOMS compliance, we go beyond conventional consultancy. We provide proactive insights, continuous support, and strategic advice to ensure that your business thrives in the evolving landscape of the travel and tourism industry.

 

Get in contact

Whether you’re a tour operator, travel agent, or a business providing related services, our team is dedicated to assisting you in navigating travel VAT. Contact us today to schedule a consultation and discover how we can tailor our expertise to suit the unique needs of your business. Let The VAT Consultancy be your partner in the world of travel VAT, guiding you towards efficiency, compliance, and sustainable growth.

Your TOMS journey starts here. Contact The VAT Consultancy and experience the difference.