Opinion

Are we personally liable for tax bills?

Governance | 1 May 2008

Dominic Lawrance responds to a desperately worried chair of trustees who has just been hit with a £120,000 VAT bill.

Dear editor,

I am chair of trustees of a charity with a turnover of just under £500,000. We have about £20,000 in reserves and the charity works in rented accommodation. The charity is unincorporated. We believe the charity is well managed, well governed and achieving its charitable objects helping very vulnerable people.

A year ago, inspectors from Revenue & Customs (HMRC) came to do what we believed to be a routine VAT audit. We were flabbergasted to be informed that the charity owes over £120,000 for non-payment of VAT going back over ten years. We, the trustees and our auditors, did not accept their judgement and appealed. We have just lost the appeal.

HMRC are demanding the money now but the charity does not have it. As we are unincorporated, the trustees have been told that they are personally liable and must pay. With only five trustees, this will amount to almost £25,000 each, which none of us has. We have been told that our personal assets could be seized. The only major asset we have is our homes.

Even if we wound up the charity, there wouldn’t be sufficient assets to meet the VAT bill. Are we really personally liable? Is there any thing we can do to get out of this nightmare? We are sick with worry. Can HMRC insist on payment now?

Yours sincerely,

A desperately worried chair of trustees

Dear desperately worried chair of trustees,

It is an often overlooked implication of being a trustee of an unincorporated charity that you have personal accountability for the tax liabilities of the charity, in addition to the more obvious liabilities for negligence, contractual obligations, etc.

Broadly speaking, VAT applies when a person supplies goods or services in the course of a business where no exemptions apply, and the aggregate annual value of those goods and services exceeds a certain threshold. This applies to all charities.

Some charity fundraising events are exempt from VAT. In addition, a sale or letting of goods which have been donated to a charity will usually be a zero-rated supply. However, your auditors may have already looked into these possibilities.

You should try to arrange a realistic repayment schedule with HMRC but, at best, this is unlikely to delay repayment of the full sum for more than six months. HMRC only enter into such arrangements in exceptional circumstances and you will need to convince the VAT office that it is not necessary to enforce the debt now.

As tax liabilities are usually a legitimate expense of running a charity, the trustees may be able to use donations to the charity to pay off the VAT liability, or scale down charitable operations until the liability has been paid. In addition, you should consider approaching grant-making charities in the hope of securing extra funding.

A less palatable alternative would be for the trustees to lend their own money (if necessary, borrowed from a bank) to the charity on an interest-free basis and then have the charity pay back that loan back when (and if) it can. As this may involve the trustees re-mortgaging their homes this would obviously be a last resort.

Your situation shows the importance of obtaining professional advice. If you did in fact seek such advice and were told that VAT would not need to be charged and accounted for (or VAT was not mentioned) you might wish to consult other advisers regarding a possible claim of professional negligence.

Dominic Lawrance is an assistant solicitor at Macfarlanes

Tweet

Directory: HM Revenue & Customs (HMRC) | Macfarlanes LLP