The Tax & VAT Implications of Recharges Between Charitable Rugby Clubs and Their Wholly Owned Trading Subsidiary Companies
Recharges by the Charity to the Trading Company
Charity clubs will often incur expenses on behalf of their trading companies. These might be the purchase of goods for the company, or might be costs as a result of the use of charity space and utilities by the trading company, or might be for the use of club staff employed by the charity. Charity clubs are generally required by charity law to recharge their trading companies for those costs. Such recharges create income in the hands of the charity club.
Charities are only exempt from tax on income received:
· In connection with the charity’s primary purposes – i.e. rugby activities.
· That is in ancillary to the primary purposes
· Is covered by the small trading exemption (£5,000 per charity or 25% of income up to a maximum exemption of £50,000)
· Is exempt from tax as the sale of donated goods, or is covered by the fundraising events exemption, or is covered by another exemption such as income from property.
Charities otherwise pay tax on general income, which includes profits made on recharges made to trading companies for the use of facilities, staff, and the recharge of goods. If the recharges are made at cost then there is no profit on which to pay tax. It is therefore recommended that such recharges are made on an “at cost” basis.
If the charity licences the trading company to use the club’s name and logo for a fee that will not be covered by the primary purposes trading exemption, but if the fee is kept at a reasonable amount the fee ought to be tax exempt under the small trading exemption.
VAT on charges between a charity and its trading subsidiary
Recharges between a charity and its trading subsidiary will be subject to VAT unless exceptionally the charitable club and the trading company are in a VAT Group in which case VAT is ignored on any recharges between the two.
VAT will otherwise only apply in reality if the charity is either VAT registered or if the value of the recharges and any other VAT taxable supplies made by the charity pushes the charity above the VAT compulsory registration threshold of £82,000 per year (2015/16 threshold). This should not be an issue for most small clubs. If the trading company is itself VAT registered charging it VAT will not be an issue – it should be able to recover any VAT charged by the charity on recharges.