1. Taxation & VAT Update
Ros Clarke, Tax Manager & Alison Birch, Senior VAT Manager North West Housing Conference: Friday 4 November 2016

2. Agenda Corporation Tax VAT SDLT Interactive Case Studies
Trading subsidiaries
Q & A

3. Charitable Exemption to Corporation Tax
There is a general exemption for charitable trade contained within Part 11 of Corporation Tax Act 2010
Exemption for trading income in respect of the profits of any trade carried on by a charitable company, if the profits are applied solely to the purposes of the charitable company and either:
The trade is exercised in the course of the actual carrying out of a primary purpose of the charitable company; or
The work in connection with the trade is mainly carried out by beneficiaries of the charitable company

4. Allowed Non-Charitable Income
The only exemptions to the above are:
Turnover is:
Less than £5000; or
Whichever is the lesser of £50,000 and 25% of all of the charitable company’s turnover for the accounting period
Under charity law, it may be permissible for charities to carry out activities which are taxable

5. Non-Charitable Expenditure
If a charity incurs non charitable expenditure, income equivalent to this is taxed
Examples:
A non-charitable trade incurs a loss, loss is taxable income
A loan is made for non charitable purposes, loan amount is taxable income
Developing properties for non charitable purposes is taxable.

6. The Joint Guidance Produced by HMRC, HCA and Charity Commission
Gives examples of taxable activities in relation to rent, shared ownership and outright sale
Each household has to be assessed for charitable need
Provides a clearance mechanism which provides certainty
Only to be used where there is doubt

7. Problem Areas Keyworkers – regional issues - affordability
Shared ownership
LCHO
Assessing charitable need
Other income

8. VAT: Liability of supplies
VAT is a significant cost and burden for social housing providers due to the different VAT liabilities of the transactions:
Affordable housing – exempt
Sale of housing – taxable or exempt
Shared ownership – taxable and exempt
Commercial – taxable or exempt
Repairs to properties – taxable or exempt
Refurbishment of stock from LAs – taxable
Back office services to other HAs - taxable

9. VAT: Recovery
VAT can only be reclaimed to the extent that it relates to taxable supplies:
Costs relating to exempt supplies – not recoverable
Costs relating to taxable supplies - recoverable
Costs relating to non business income/activities – not recoverable
Costs relating to all activities – residual
Partial exemption calculations need to be undertaken to determine how much VAT on overhead costs can be reclaimed

10. VAT: Complex Areas Reducing irrecoverable VAT
Joint contracts of employment
Costs sharing exemption
VAT grouping
Qualifying conversions
Option to tax

11. SDLT There is a general charitable exemption
Land needs to be used for charitable purposes
Exemption will be disapplied if land not used for charitable purposes.

12. Some Illustrative Case Studies…

13. Case Study 1:
Scheme with 20 houses for social rent plus 4 commercial units
2 commercial units let to charities

14. Case Study 2 Office accommodation purchased with surplus space
Surplus space will be let at market rent
Meeting room will be hired out as a conference facility with services provided

15. Case Study 3:
Redevelopment of a redundant industrials site alongside commercial and leisure space
160 new homes – 50 social rent, 50 shared ownership to eligible charitable beneficiaries, 60 outright sale
Income from outright sales makes scheme viable

16. Commercial Subsidiary
100% owned/controlled by the Charity
Non charitable trade should be in the subsidiary
Taxable surplus can be gift aided
Taxable surplus may be significantly higher than accounts surplus with adjustments for depreciation, grant amortisation and revaluations
Amount needs to be paid within 9 months of year end

17. Commercial Subsidiary: Further Considerations
Consider how funding is to be provided – commercial interest rate – loads from charity may be deemed non charitable expenditure
Gift aid of surplus may drain working capital requirement for loan repayment or future investment
Tax is likely to be payable to some extent
VAT and SDLT implications also arise

18. Governance requirements
All new activities/housing schemes should be reviewed to determine if they are charitable
Any non charitable activity structured in subsidiary
Annual review of current schemes to ensure they still comply with charitable trading e.g. shared ownership

19. Any Questions?

20. Thank you for your time!

21. Any questions? Please contact: Ros Clarke Alison Birch Tax Manager
Senior VAT Manager