CIC Association

Serving Community Enterprise

CIC can help save Charity 150 million a year in VAT

I can imagine the headline may raise a few eyebrows, but with the VAT increase happening today I thought it made sense to raise the issue again and test the validity of such a statement.  The legislation is open to any individuals/types of organisation to use to tackle particular issues, but organising information thats useful to particular stakeholder groups such as Charities must surely be encouraged, especially in these challenging times.


The Charity Tax Group brought out figures suggesting the new VAT rate would see the combined Charity VAT bill increase to £1.5 billion pounds annually. I think correct use of the CIC legislation by Charities could easily reduce the bill by 10% at least (and that's being conservative). Other than awareness ive still had no real reason as to why it couldnt in all the conversations ive had so far, and in some cases it could be the difference between survival or not.


Its not scientific but over Christmas I watched BBC news reporting 25% of Manchester Charities may close in 2011, extrapolate that and the wider challenge facing Charity seems truly enormous. Its not a magic wand but CIC will provide options. Of course there will be areas that this wont work and there are a few caveats but 10% is not unreasonable. There are examples of it happening already and in many ways it quite a simple, logical step to take. 


Very simply form a CIC subsidiary thats wholly owned by the Charity. (This can also be used to make Charities more efficient when bidding for new public sector contracts) As a CIC, the asset lock and community benefit test give reassurance to the Charity Trustees that profits are locked in and cant be stripped out of the subsidiary. The CIC is used to generate trading income and can reclaim VAT on its expenditure, potentially saving £200 per £1000 when compared with the cost for a stand alone Charity. The CIC profits can be donated to the Charity, mitigating any corporate tax liability. 


Anyway, please do add to the debate, whatever your opinion - I think this is a key area we should focus on and your opinions will help keep us on point.






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Comment by Alastair Irvine on January 7, 2011 at 16:04
Although my comments do assume that the thing the charity/business is supplying is a VAT-able supply and not an Exempt supply (most services supplied by banks are exempt for example). This is nothing to do with the legal entitiy status and purely based on the nature of the supply.
Comment by Alastair Irvine on January 7, 2011 at 16:02
I see where you're coming from John.

Its difficult to comment as it will depend on the exact nature of what Sue Ryder are providing, and who (if anyone) is paying them for the services they're providing.
Seems bizarre, but broadly speaking if someone is paying them to deliver palliative care then they will probably be able to charge (and recover) VAT.
If they provide care free; there's nobody to charge and no Input VAT recovery available as it would be part of the Charitable Objects.
Back up for this at Para 3.10 of this file ( - note how they describe it as a 'Concession' which makes it sound like a good thing!

Dig into the detail a bit and you can see the Charity Tax Group has its sums right - talks about charities being unable to recover VAT on their non-business activities, which a charity's charitable activities are. The implication being that VAT on business activities can be recovered, which is correct.

I'm afraid that Sue Ryder and/or Third Sector magazine have been slightly misleading in the crucial detail.
Either that or Sue Ryder needs a new accountant.
Comment by John Mulkerrin on January 6, 2011 at 14:52

Thanks Adrian and Alastair

Paul Woodward, ceo of Sue Ryder care Charity, was calling for Charities to be placed on an even footing with limited companies, local authorities and parts of the NHS

John Hemming , Chair of Charity Tax Group said ' Under the current regime, charities lose out compared with the organisations they're competing with'


your comments seem to suggest that this isnt the case?

Comment by Alastair Irvine on January 6, 2011 at 12:30
Nice try John, but Adrian is correct. The charity could apply for VAT registration to apply to its trading activities ("supplies" in VAT-speak) and fully recover input VAT on these activities. It is the charitable supplies/activities that are not VAT-able; not the charity itself.
It is actually probably better (do the math for your particular case) to be what would be a partially exempt (partially trading) charity as then you should get back some VAT on central overhead costs such as accounting etc.

What charities need to do is vertically integrate their supply chain. Bring as much in-house as possible, to minimise the Input VAT on things they buy. Sadly this goes completely against the current global business trend of outsourcing.
Comment by Adrian Ashton on January 6, 2011 at 11:40

but given that (1) a charity can register for VAT, and (2) you can register for VAT at any point, why set up a trading subsidiary to reclaim your VAT through?


surely simplier and less confusion and hassle to keey the charity as it is and apply for VAT registration?


or maybe I've missed something and the accountants in the association can set me straight?


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