Tens of thousands of charities face extra costs from digital tax returns

03 Nov 2017 News

Tens of thousands of charities across the UK will have to file digital tax returns from 2019, at cost of many million pounds, after HM Revenue & Customs said an exemption will not apply to VAT.

The government had announced earlier this year that charities would be exempt from its Making Tax Digital (MTD) scheme although their trading subsidiaries would not.

But according to the Charity Tax Group, HMRC said in a recent meeting that this exemption only applies to corporation tax, not VAT returns.

CTG chair John Hemming said his organisation had previously been under the impression that charities would be exempt from VAT returns as well.

He said CTG had been pushing for further exemptions, including for charity groups, but HMRC had refused any exemption on the basis that it would be “distortion” and produce “unfair competition”.

Hemming said there is now little chance of HMRC allowing any exemptions for VAT filing.

“There is no indication they will change their mind,” he said.

All charities with an income of more than £85,000, of which there are likely to be at least 40,000 in the UK, will have to file digital VAT returns from April 2019.

Charities will have to purchase software in order to comply but this is not yet available and Hemming said HMRC has not given any indication of how much it could cost. It will depend on the “market of different suppliers”, he said.

Previous estimates of costs for filing returns with HMRC have found that charities would have to pay at least £100 a year, and larger charities much more. The cost is therefore likely to be several million pounds.

Hemming said that HMRC told CTG it will also be piloting the changes from Spring 2018 “and is keen to ensure a wide range of different organisations, including charities, take part in that pilot to ensure everything is thoroughly tested”.

Charities are still due to be exempt from filing digital corporation tax returns, although their trading subsidiaries are not, but this requirement has been deferred to an unspecified date.

Hemming said CTG will resume discussions with HMRC regarding corporation tax exemptions after it has announced when this requirement will come in place.

According to CTG's summary of the meeting on 11 October, HMRC said charities will have to keep all prime records in an electronic format, and should include any adjustments made.

The department said each step in the accounting process after inputting source data must be digitally managed.

While HMRC will be able to digitally examine the VAT return data as it reaches their systems, it will not be able to access charities’ underlying data.

In future, HMRC will sense-check the data it receives at the point of submission and prompt a question or request further data if there appears to be an inconsistency with previous information.

 

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