Finance Bill 2012 to encourage charitable giving and collaboration

In December 2011 the Government published its Draft Finance Bill, which contains two provisions intended to encourage tax-efficient charitable giving from high net worth individuals.  In particular, it is proposed that:

• where a testator leaves at least 10% of his/her net estate to charity, the estate shall be subject to a reduced 36% rate of inheritance tax; and
• where a taxpayer donates or loans a pre-eminent cultural object or collection of objects to certain charities or accredited museums for safe-keeping and public access, he/she will receive a reduced personal tax liability based on a percentage of the value of the object they are donating.

In addition, following public consultation the Government has confirmed that it intends to introduce legislation implementing a VAT cost-sharing exemption into the Finance Bill 2012.

Article 132(1)(f) of the EU Principal VAT Directive permits Member States to allow groups (subject to certain conditions) to be exempt from VAT supplies made to members.  Until now successive governments have failed to implement this provision into UK law.

However, the proposed legislation will enable organisations such as charities, universities, further education colleges and housing associations to establish a group that will share costs and thereby benefit from economies of scale or increased purchasing power without suffering an adverse VAT cost when the group members meet their share of those costs.

In order to benefit from the cost-sharing exemption, the following conditions will need to be met:

• the cost sharing group must be independent;
• members of the group must make exempt and/or non-taxable supplies;
• supplies by the cost sharing group to its members must be at cost;
• the services supplied by the group to its members must be “directly necessary” for the members’ exempt and/or non-taxable supplies; and
• cost-sharing under the exemption must not cause a distortion of competition.

The exemption will not entitle the recovery of VAT that is otherwise irrecoverable.  However, it will mean in practice that organisations can establish a group to purchase goods and/or services which do not attract a liability to VAT (e.g. employee costs and certain property costs) in a way which enables them to avoid irrecoverable VAT when those costs are shared.

The final details and guidance will be published with the Finance Bill 2012 on 29 March 2012.

For more information please contact Chris Hook, call 0191 211 7929 or email [email protected].