HMRC Nudge Letter Campaign to educate VAT Registered Charities with Non-Business income

Earlier this month HM Revenue & Customs (‘HMRC’) issued a ‘One-to-Many’ email to VAT registered charities with an annual turnover below £2m. Whilst the email didn’t require a response it is not something that the recipient should ignore.

What are HMRC nudge letters?

It would be wrong to assume that this is simply a computer-generated email issued randomly.

The ‘One to Many’ / ‘nudge’ letter approach is HMRC’s way of highlighting to a specific business sector an area of tax which they have identified as often not being treated correctly, to educate it specifically on this area.

Nudge letters are nothing new and do not necessarily mean there has been any wrongdoing. The aim of the current round of emails is to increase awareness within the charity sector of the requirement to complete business/ non-business apportionment calculations as part of their VAT compliance checks. Many charities are not aware that there could be a requirement to restrict input tax which relates to non-business activities and therefore do not adjust for this when completing their VAT returns.

The email sent by HMRC links directly to the VAT guidance (VAT Notice 700) to help charities determine if its activities are business activities for VAT purposes. It provides clear examples of the difference between business and non-business activities to encourage charities to review their tax affairs so they can get the tax right first time.

What Business/ Non-Business Adjustment is required?

HMRC agree that this is a complex area of VAT and care needs to be taken.

At high level, to decide if an activity is a business activity for VAT purposes it is necessary to consider whether there is a direct link between the services received and the payment made.

HMRC have a 2-stage test to help determine if there is ‘consideration’ or some value given in return for the supply and, whether it is carried out for the purpose of obtaining income (remuneration), even if the charge made is below cost.

Before completing any partial exemption calculation, a charity is required to perform a business/ non-business split of its expenses to restrict any VAT on costs that wholly relate to its non-business or charitable activities. VAT on any residual costs (i.e. costs which relate to both business and non-business activities) will need to be apportioned and recovered using a ‘fair and reasonable’ basis. There is no defined method to be used for the apportioning.

If I received a letter what should I do next?

As mentioned, whilst HMRC have not requested a response, this does not mean that the letter can be ignored. Any charities in receipt of the recent HMRC email should review their VAT position to ensure that they are compliant as failure to correct any errors could result in additional tax becoming due and interest and penalties being charged.

It is likely that this specific aspect of VAT will become a focus for HMRC in the coming months and years. With this in mind, if errors are found during a future enquiry HMRC may not be as lenient as they otherwise might have been as, having received the guidance email, the charity should be aware of the requirement to apportion its VAT accordingly.

In all cases, if a mistake is identified in the VAT return preparation process resulting in an overclaim of input tax then disclosing the error before HMRC opens an enquiry into the business will lead to the most favourable outcome, as this will be treated as un-prompted disclosure for penalty purposes.

How can AAB help?

If you identify an error in your VAT return filings or are uncertain around the VAT treatment of any aspect of your income or expenditure, our highly experienced Indirect Tax Team are here to help. If you would like to discuss this further, please speak to Laura Moore, Maria McConnell, or your usual AAB contact.