A SPECIALIST charity accountant in York is warning organisations they could be in line for shock VAT bills after HMRC tightened up its monitoring of VAT rules.
The Press reported last week on the Restore housing charity which is facing financial crisis after City of York council cut housing benefit to many of its tenants.
Now accountant Peter Brown is warning another finance time bomb is waiting for many charities if trustees don’t get help to navigate the tax implications of their funding agreements with local councils.
In the past many local authorities had loose funding arrangements with charitable organisations, often giving large chunks of cash with little documentation to back it up. That practice has now had to change as funds are being targeted at the services councils are legally obliged to provide, said Mr Brown.
Now the accountant, who runs specialist charity auditors Sorpaid based in Acomb, said councils have tightened up on this by either turning their funding agreements in formal contracts, or making the money a grant which can only be spent on particular processes.
If the council uses formal contracts the charity then becomes liable for VAT, and must make sure it adds the tax onto any bills issued to the council – although the authority can later claim the tax back from HMRC.
The problem lies, Mr Brown said, when charities either do not realise they are entering into formal contracts with tax implications and so do not declare the tax they owe, or when the funding documents are unclear leaving the organisation open to unexpected tax bills and harsh financial penalties much later on.
With examples from around the country of charities facing bills as high as £90,000, Mr Brown is now calling on local authorities to make sure the small charitable organisations they work with understand the tax situation, and take the right steps to make sure they are not hit with harsh bills.
He said: “The real tragedy in this is that if things are done properly, there’s no need for anyone to lose any money over it.”
“It’s right that public money is properly controlled, but many local charities are run by volunteers and part time staff. They may have been sent forms by the local authority, but haven’t properly understood what they are.
“I think local authorities have a duty of care to explain this,” he said.