Input Tax Recovery

Where a Charity is registered for VAT, it is likely to be have both business and non-business income. It is therefore required to carry out a “business : non-business” (BNB) calculation to determine how much input tax it can claim. The rules are, as you would expect, not easy to follow.

The basic principle is that VAT incurred on non-business activity cannot be reclaimed. VAT incurred on business activity can be reclaimed.

Depending on your specific circumstances, a method can be operated without notification to HMRC. The legislation requires only that the method is ‘fair and reasonable.’ Ideally the method you use will be easy to operate and easy to check.

We can review an existing method, or advise on the most appropriate method to use. Where necessary we can assist in negotiating a method with HMRC.

If you have the added complication of exempt business income, then you are required to carry out a ‘Combined Method,’ which takes into account all the various income streams. The additional complication is because VAT cannot be reclaimed in relation to exempt business activity.  This is generally more complex than a BNB, and usually requires notification to, or negotiation with, HMRC.

The basis of the method is especially important where you have a substantial property development, as the amount of input tax at stake can be very large. You will also need to consider future use of the property for ten years, under the Capital Goods Scheme (CGS). This will mean an annual calculation to reflect any changes in use of the property.

If the Charity has a subsidiary trading company, then a BNB or Combined Method may work in conjunction with a VAT Group registration. Whilst this does introduce a further issue (a Group Registration), this can also provide significant administrative savings.

There are often a number of inter-related VAT issues to consider, but please do contact us for an initial discussion.