Charities – New VAT Compensation Scheme

VAT has always been a significant burden in the Charity sector in Ireland with few opportunities to recover any of the VAT being incurred on the daily costs of running a charity. The Report of the VAT on Charities Working Group in 2015 was the catalyst for re-engagement between the Dept. of Finance and the charities representative group, Charities Institute Ireland, resulting in the announcement in October 2017 by the Minister that a scheme would be introduced.

The Charities VAT Compensation Scheme was formally announced by the Minster in his Budget 2018 speech and all that was known at this point was that the Department of Finance has decided to use the Danish style model whereby charities would reclaim VAT incurred in direct proportion to fund raised income up to an overall capped limit for all charities filing claims.      

Revenue e-Brief 219/18

On 27th December last Revenue issued e-Brief 219/18 setting out in detail what was required for a charity to file a claim.  This 12-page document sets out the primary criteria which must be met by a charity in order to qualify to submit a claim in the first instance.  It then proceeds to set out some additional conditions that must be met by charities wishing to submit a claim and how to go about submitting a claim, including details of the supporting documentation required, and details of the timelines for the submission of claims.

The key points in the Revenue guidance are as follows:

1.

At the date of claim the charity must be both registered with Revenue as a charity and hold a charitable tax exemption (CHY number) and be registered with the Charities Regulatory Authority (CRA)

2.

Claims must be submitted by 30th June of the year following the claim.  There can be no exceptions to the deadline as the totality of claims are compiled and a percentage of the claim repaid based on the €5m cap.  The minimum value of claims being accepted is €500. The first such claim must therefore be made by 30 June 2019 in respect of VAT incurred on “qualifying expenditure” in the calendar year 2018

3.

The repayment system operates on a “cash basis” therefore only “qualifying income” that is received in the period of claim and “qualifying expenditure” actually paid in the period of claim are relevant to the repayment claim calculation.

4.

Establishing the quantum of the Charity’s “qualifying income” is the key to this calculation as the amount of qualifying expenditure reclaimable is based on the proportion of privately funded income to publicly funded income.  In order to establish the “qualifying income” the charity must first calculate the total income received in the period and then deduct the following income streams:

  • Educational fees received (if charity is a school/university etc)
  • Income from shops, restaurants, retail outlets
  • Refunds or reliefs received under any other scheme administered by the Revenue Commissioners
  • Public funding from State bodies in Ireland, the EU, international organisations in receipt of public funding, another qualifying charity

5.

The next step is to identify the quantum of “qualifying expenditure”.  Unfortunately, the guidance is vague in this regard and refers only to “goods or services which were used by the charity only for its charitable purpose”.

6.

The amount of the any claim will be the VAT on “qualifying expenditure” multiplied by the charity’s privately funded income as a proportion of its total income.

Example: VAT on “Qualifying Expenditure” x (“Qualifying Income”/”Total Income”)

The charity must hold a current Tax Clearance Certificate at the time of claim and when the claim is settled in order to qualify for repayment. Additionally, the claim must be accompanied by a written Declaration from the CEO or CFO of the claimant charity as to the validity of the claim on the charity’s headed paper.

The guidance also provides details of a range of additional conditions that may have to be met by the claimant to support its claim. These largely relate to the standard requirements in relation to the retention of records, etc., and some of them are, for example:

  • Have evidence that the goods/services on which they are claiming VAT was applied for charitable purposes,
  • Satisfy Revenue that the VAT they are seeking to reclaim was paid in the year to which the claim relates,
  • Provide to Revenue (if requested) a copy of its most recent set of audited accounts,
  • Demonstrate to Revenue (if requested) that the charity was not entitled to a deduction or refund of the VAT being claimed under any (other) legislation administered by Revenue

Recommended Actions

As there is a significant level of uncertainty as to the amount of VAT that will be repaid to each claimant, we are recommending a two-step approach be adopted by charity’s considering making a claim:

Step 1:

Establish what the proportion of privately funded fundraised income is in your organisation. 

If the amount of public funding/shop income far outweighs the income generated from private fundraising, then it may not be worthwhile making a claim.  For example, if after carrying out this calculation the level of private fundraised income represents only say 5% of total income, then it would require significant amount of qualifying expenditure to generate a VAT reclaim worth pursuing, especially as it is likely that the organisation will only receive a percentage of this claim in any event as a result of the overall €5m cap.

Step 2:

Once it has been established that a claim is worthwhile pursuing based on the initial exercise above, we recommend gathering the required records and documentation necessary to make a valid claim are assembled and reviewed to ensure that the claim is complete and fully supported by the necessary documentation and records when it is submitted. 

If you have any questions in relation to the above, or if you would like to discuss this topic further, please contact a member of the Mazars VAT team below:

Staff Member

Position

Email

Telephone

Frank Greene

Tax Partner

fgreene@mazars.ie

01 449 6415

Alan McManus

Indirect Tax Director

amcmanus@mazars.ie

01 512 5525

Gerry Brennan

VAT Director

gbrennan@mazars.ie

01 449 4402

February 2019

FEBRUARY 2019 TAX NEWSLETTER

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February 2019 Tax Newsletter

This series of articles will provide you with an update on tax developments that impact organisations in Ireland and those that do business with Ireland.