Tax Advisory

Commercial standards do not carry over

A non-profit pays corporate tax only on income from its profit-making business. Where that business ends, and on what basis shared costs are allocated to it, differs from one body to the next. For a public institution, whether a grant or endowment is taxable turns on its legal character, and the VAT exemption test is applied differently than for an ordinary trader. Handled on commercial assumptions, you either pay tax you did not owe or face an assessment with penalties years later.

Non-profits — what we look at

• Segregated accounting

  The law requires the profit-making and non-profit-making activities to be recorded separately. How shared payroll and overheads are allocated between them determines the tax. The basis, once chosen, has to be applied consistently, so it must be set correctly at the outset.

• Reserve for proper purpose business

  A portion of profit-making income can be set aside as a reserve and deducted. It must then be spent on the proper purpose business within five years; whatever is left is brought back into income and taxed at that point. We design the amount and the spending plan together.

• Interest and dividend income

  You may either let withholding settle the liability or include the income in the return with other profit-making income. Which is better depends on the year's result, so we calculate it before deciding.

• VAT exemption

  Education, medical and cultural services are exempt where the conditions are met, and taxable where they are not. If you carry on both, the basis for apportioning input VAT also has to be fixed.

Public interest corporations — what follows the endowment matters more

Inheritance and gift tax law does not tax assets endowed to a public interest corporation, but in exchange it keeps checking that those assets are genuinely applied to the public purpose. Breach the conditions and gift tax can be assessed long after the endowment itself.

• Direct use for the public purpose

  As a rule the assets must be applied to the public purpose business within three years of the endowment. Where that is delayed for unavoidable reasons, the reason and the plan must be documented.

• Shareholding limits

  Where endowed shares exceed the prescribed proportion of the issuing company, gift tax applies to the excess. The limit depends on the type of body and on whether it meets certain conditions, so it should be checked before the endowment is made.

• Disclosure and external tax verification

  Above a certain size, financial statements must be disclosed and verified by an external professional; larger bodies also require an external audit. Missing the deadline carries penalties.

• Use by the donor or related parties

  Penalties apply where the donor or a related party uses the endowed assets or derives a benefit from them. We review board appointments and transactions alongside this.

Public institutions — the points that come up in practice

• Whether the body is liable at all

  The State and local governments are not liable to corporate tax, but invested and endowed bodies and public enterprises generally are. We start from the statute the body was established under.

• Grants and endowments as income

  Taxability turns on what the money legally is. We look at the statute it was paid under, the restrictions on its use, and any obligation to account for it.

• The VAT boundary

  Goods and services supplied to the State or a local government are exempt, with exceptions. In agency and delegated arrangements in particular, who issues the tax invoice has to be settled first if input VAT problems are to be avoided.

How the engagement runs

1. 01

   Understanding where you are

   We review the enabling statute, the articles, and three years of returns and financial statements to see how matters are currently handled.

2. 02

   Setting out the issues

   We report on what in the current treatment could be challenged, and on the reliefs being missed.

3. 03

   Written opinions

   Questions are answered in writing, grounded in the legislation, rulings and case law. The opinion then stands as your evidence in an audit or inspection.

4. 04

   Ongoing retainer

   Engagements can be monthly or matter by matter. Around closing and filing dates we come to you first, on the schedule.