HMRC: The Social Enterprise Angle

Posted: 16 April 2012, in Blog

HMRC: It is not just the blue half of Glasgow who should be concerned

If you are of a certain age, then it is entirely feasible that you will have railed against the State at some time or other. Whether it is petty bureaucracy or just really really stupid and infuriating “big” policy decisions I’m willing to guess that you will have lost it at some point.

I tend to subscribe to the cock up theory of government. This attitude dismays my more politically active chums who disagree with my jaundiced view that (quite often) there is little between the parties and that we appear to be ruled by a self-serving political class that encompasses all the main players. Politics therefore has been reduced to personality contests and marginal policy differences in a managerial system of government.

Anyway, the big buzz du jour is all about tax and how the Chancellor has threatened the very existence of charities with his attack on tax dodging by philanthropists and the obscenely rich. Having just signed a gift aid form for a charity myself (furniture donation), here is a wee suggestion; give the charity the tax relief and tell the philanthropists that their reward is in giving, not in reducing their tax bill. That should separate the chancers from the benevolent. Impacting on philanthropy by the mega rich might also create an external pressure on weak charities to transfer their assets to another charity, merge or close down. Perhaps we should also ask if every charity deserves to survive.

Anyway, HMRC is also active in the social enterprise arena (but sadly little mention in the mainstream media) due to a decision on VAT that will really impact on social enterprises.

The issue is all about trading and designating earned income as grants or funding. In HMRC v Aberdeen Sports Village Ltd a tax tribunal found that a contract for supplying public services is not to be treated as grant funding and is subject to VAT. The rationale is as follows:

….If a contractual relationship is about providing services to the organisation awarding the “funding” (or to provide services to a number of parties, one of which is the funding organisation) than this “funding” is subject to VAT…..

The bottom line is that the money in this case was not a freely given grant.

This raises a point I’ve railed about before; that the ambiguity and imprecision prevalent in the language and literature related to social enterprises has to change. This is because this abstruseness has significant dangers for the fragile finances of social enterprises, many of whom may not be accounting for VAT properly. The message from HMRC for social enterprises is loud and clear. Forget the various terms for money that abound in the sector and determine if a payment is a real grant or in reality a contractual payment for services.

The SENSCOT Scottish Social Enterprise Criteria also cover this by describing real social enterprises as having limits on grant income. Public sector financial support is deemed to be ok as long as this is contract based and not solely grants. The SENSCOT rationale is to distinguish social enterprises form voluntary organisations.

So, apart from Sir Tom Hunter and his ilk baulking at wee Geordie Osborne’s effrontery and the Rangers’ Board trying to justify gross mismanagement, are HMRC and/or the Government doing anything else to get up folks noses? Well aye actually, plenty. Big Society Capital has launched but more of that another day.

Suffice to say that you need to talk to your accountants asap and ask if they are up to speed on the tax treatment of social enterprise and charities. Unless you are Vodafone, Amazon or (possibly) Rangers FC it is unlikely that HMRC will let you off without paying your due as ignorance is no defence to those boys in the bowler hats.


NOTE: This blog does not necessarily reflect the views of Social Enterprise Scotland or endorse any political position.