CTG identifies several errors in new HMRC Notice 701/1 Charities

We reported two weeks ago that HMRC has issued a new version of Notice 701/1 Charities. However, the Charities Tax Group (CTG) has taken the time to review the notice in detail and compare it to the previous version, and has found some deficiencies.

CTG reports that the only change since the previous version is to incorporate the update and flowchart relating to Challenge Events into the main body of the document in a new Section 10. In addition, CTG has found a number of areas where the Notice is out of date. Examples are as follows:

• Reference to a VAT standard rate of 17.5% rather than the actual rate of 20%.
• Reference to zero rating of alterations to listed buildings (removed in 2012).
• Reference to Business / Non Business and Partial Exemption apportionment as a process in stages. From 1 January 2011, HMRC has been able to approve a combined method for these calculations and will no longer approve separate Business / Non Business and Partial Exemption methods.
• Reference to the supply to charities of energy saving materials in a building intended to be used solely for a relevant charitable purpose as reduced rated (withdrawn in 2013).
• A statement that there is currently no regulatory body for charities based in Northern Ireland - The Charity Commission for Northern Ireland (CCNI) is the independent regulator of charities in Northern Ireland.
• A note that the address for any comments on the Notice is as New Kings Beam House in London SE1 - HMRC moved away from this address some years ago and it is not now an HMRC building.

There are also a number of omissions from the document, being developments that have taken place since 2004. Examples of these are:

• The impact of the 2005 Church of England Children’s Society High Court case ([2005]STC 1644] giving charities the right  in certain circumstances to recover a proportion of VAT charged on fundraising costs as residual VAT related to their overall economic activities. The Notice implies the reverse because it says “ ...a charity cannot reclaim any VAT it is charged on purchases that directly relate to non-business (outside the scope) activities ...”  In fact there is no guidance on this important case on the HMRC website now because business brief 19/05 (2005) which explained the issue, has been archived (although it can be found on the National Archives website). Nor is there any mention of the related litigation in the University of Cambridge case on investment management fees where the result of HMRC’s defeat on the same principle in the FTT is awaited.
• The VAT cost sharing exemption, now implemented in UK VAT law (incorporated in Group 16 Schedule 9 VATA in 2012).
• VAT and postal services – the 2012 changes that mean that bulk mailing services are no longer exempt and are subject to VAT.

CTG has written to HMRC to express concern that this has already caused confusion within the sector and has called for urgent clarification on the HMRC website. CTG has also expressed concerns about how charities will be able to monitor changes to the document now that it is in html format, and that HMRC’s own website does not have this newest version of Notice 701/1 - it can currently be found on the gov.uk website.