As part of the efforts to mitigate some of the financial pressure of Covid-19, HMRC announced new measures last March to enable businesses and a range of other organisations, including charities, not-for-profits, and member-run groups, to apply for a refund in their VAT payments.
The new policy is designed to help those organisations which have experienced lower than normal VAT recovery rates during the pandemic. Using a retrospective special method based on the previous year’s VAT percentage (which covers pre-Covid trading conditions), HMRC has set up a new unit which looks more favourably on applicants which can demonstrate that they have been affected.
Since the onset of social distancing measures and lockdowns, many charitable organisations have seen a decline in revenue from activities which can be their primary source of taxable income. These include income from shops, cafés or bars, and admission fees.
We also helped a small arts charity claim a VAT refund of around £4,000
In the meantime, other non-business or exempt activities such as grants, welfare, education and property income may have stayed the same. This combination of factors has created an imbalance within many organisations’ overall VAT recovery position. Furthermore, those which have been making capital goods scheme adjustments for property projects may also find themselves with an imbalance.
The change in rules from HMRC is therefore very welcomed, but evidence on the ground suggests that many charities and other not-for-profit groups are not fully aware of the financial benefits they can accrue from applying for a refund. The savings can be significant, especially at a time when finances are under extreme pressure for many groups.
We supported a cancer charity client which runs well-being centres and operates through a mix of taxable, exempt and non-business activities. Covid restrictions had a detrimental impact on its café income and commercial sales from beauty treatments and charity shop activities. Under the new HMRC processes, however, they were able to secure a VAT refund of nearly £7,000.
We also helped a small arts charity claim a VAT refund of around £4,000 after incurring a decline in its café and shop merchandise sales as well as a decrease in catering and rental activities due to Covid restrictions.
Member-run, not-for-profit clubs can also realise savings from the new scheme. We helped a golf club claim back a nearly £27,000 VAT refund due to the fact that it was not able to generate taxable income from its bar and catering facilities or maintain merchandise sales due to social restrictions.
Charities and not-for-profit groups are unique in how they operate, however, any of those which have seen their VAT recovery position and percentage lower in 2020/21 than previous years are likely to be able to claim for a refund. Organisations can also apply retrospectively for 2020/21 and for any further periods from this current tax year that are affected as a result of Covid-19.
As we find ourselves facing further uncertainty over the pandemic, I would encourage all eligible organisations to reach out to HMRC and secure what could be a significant financial rebate.
Iain Masterton is head of VAT at accountants Chiene + Tait