Key UK tax changes for not-for-profit sports clubs in 2018/19
Published 07 January 2019 By: Richard Baldwin MBE; FCA; CTA; B Com
Tax changes are constant and impact the finances of not-for-profit sports clubs. In addition to tax risks there are opportunities for clubs to use tax legitimately to enhance cash flow. This article provides a reminder of these risks and opportunities and updates clubs on the main tax changes affecting them in 2018. Specifically, it looks at:
Special status and using gift aid
Value added tax (VAT)
Employment related tax matters
Corporate criminal offences and incorporated not-for-profit clubs
Readers should note that this article builds on the author's previous LawinSport article: Key UK tax law developments for not-for -profit sports clubs in 2017/181.
The current tax environment
In the year since the author’s last article, voluntary club treasurers of not- for- profit sports clubs have faced tax changes impacting on their duties. Tax legislation, case law and HM Revenue & Customs guidance has continued to expand. In a survey in the Summer by the British Chamber of Commerce three quarters of businesses surveyed said that the burden of tax administration and compliance had risen in the last 5 years. This view was supported by the Head of Tax at the Institute of Chartered Accountants in England and Wales (ICAEW) who commented at the same time that recent tax changes taken as a whole imposed substantial additional burdens on business2. Sports clubs are generally regarded as businesses for tax, so they need to be aware of the changes.
The tax environment remains difficult, with HMRC being more aggressive in its approach to the collection of tax. This is reflected in the law which has been passed to assist with the collection process. This is perhaps to be expected given the Budget deficit which the Government continues to face. HMRC's Departmental Plan3 contains three main objectives, the first of which is to maximise revenue and bear down on tax avoidance and evasion. Some have commented that the objective should not be to maximise revenue but to collect the right amount of tax due under the law. HMRC's wording certainly indicates its direction of travel.
The House of Lords Economic Affairs Committee has just concluded that recent powers provided to HMRC undermine the rule of law and hinder taxpayers access to justice4. The Chartered Institute of Taxation (CIOT) has also suggested HMRC is taking an increasingly confrontational approach across all areas of tax and all types of taxpayer5. Unfortunately, HMRC's approach is bad news for clubs particularly since HMRC Inspectors often target them when carrying out tax compliance visits.
Changes have taken place in those setting policies and administering tax changes at both HM Treasury and within HMRC. In January the HMT tax team had two new recruits in Robert Jenrick (Exchequer Secretary) and John Glen (Economic Secretary). The Charity Policy and Operational teams at HMRC have also changed. Incidentally we have also had a new Minister for Sport.
There has been a Spring Statement, the Finance Act 2018 has become law, and the Chancellor delivered an Autumn Budget Statement in late October closely followed by Finance (No. 3) Bill (FB3), which is currently going through Parliament. Whilst some of the new law has been subject to consultation this is not always the case6. More tax changes can be expected post-Brexit!
Although much of HMRC's focus is on larger businesses, sports clubs of all sizes will be affected by tax and there are particular risks for the treasurer of an unincorporated club who gets it wrong. He or she can be personally liable for the tax due if the club has insufficient funds. Since personal liability can also extend to the club's management committee many clubs have considered incorporation to protect themselves. The legal steps and consequences of doing so have been considered in the LawInSport article: A Guide to Club Structures7. Incorporation itself can cause tax issues as explained below.
Filing returns and paying corporation tax
Unfortunately, the lack of awareness amongst treasurers of the club's corporation tax obligations has not diminished. In practice many clubs do not realise that the club has to self assess and pay corporation tax if it is liable. The same is often true of the treasurers of National Governing Body (NGB) County and Regional Associations which are separately constituted whether as companies or not. Often clubs say that they are within the mutual trading exemption. This overlooks the fact even if mutual trading treatment is available it only applies to member income. Frequently and increasingly, clubs rely on other sources of taxable income from non-members e.g. at the bar, rentals, from parties, events and sponsorship to balance the books.
HMRC updated their guidance in May 2018 - "Corporation tax: trading and non-trading”8. The guidance explains that an organisation (whether a company or not) must tell HMRC that it is active. HMRC says that generally it is considered to be active if it’s carrying on a business activity such as a trade or business, providing services, buying or selling goods to make a profit or earning interest. Corporation tax returns therefore have to be filed even if a sports club has minimal bank interest unless HMRC agree otherwise. Potentially there are penalties for not doing so.
Thankfully HMRC may treat the club as dormant for corporation tax purposes even if it is active where the following conditions apply-
the annual corporation tax liability is not expected to exceed £100, and
the club is run exclusively for the benefit of its members.
Dormant treatment will be reviewed by HMRC at least every 5 years and there are other conditions to be met. Where appropriate treasurers should consider this to avoid sleepless nights!
Reducing Corporation Tax
Clubs that face corporation tax liabilities may want to consider how they might be able to reduce those liabilities (Community Amateur Sports Clubs (CASC) and charity status are worth considering - see below). The Government have kept their commitment to reduce the corporation tax rate to 17% from the current 19% as from April 2020. The opportunities to reduce taxable profits have increased recently although the computation of those profits for a typical club is far from straightforward. Nevertheless, the detail is well worth close consideration particularly for the larger clubs with potential corporation tax liabilities on bar and catering income from non-members, substantial levels of sponsorship and rental income. Clubs should consider:
"Notional " costs which can be deductible from taxable trading income following the "Peterhead" principle9 as outlined in HMRC's Business Income Manual 24475. HMRC accepts a deduction could be made for the proper commercial rates which would have been paid for the services and facilities provided free or at an under charge in order to generate taxable profits. This might include the "notional " cost of volunteer time spent generating trading income; in Peterhead management services were given gratuitously by the members and a nominal sum was paid for facility use.
Payments of qualifying expenditure for grass roots activities which can be deducted up to £2,500 per annum. This new relief was explained in the author’s previous article10. HMRC guidance was published at the beginning of the year and is a useful reference source11.
Maximising the club's claim for Capital Allowances on its fixed assets; this is particularly important where it spends substantial sums on improving its facilities e.g. it builds a new clubhouse or installs an artificial grass surface. It is then likely to trade (if it hasn't done so already) and be subject to corporation tax.
Significant changes have been introduced in the Budget Statement and FB3 which should improve the tax relief available to clubs. Since 2008 most businesses, regardless of size, have been able to claim an Annual Investment Allowance (AIA) up to £200,000 pa; the AIA was made permanent from 1st January 2016 and enables a club to claim a 100% write off for expenditure on plant and machinery in the year it is incurred. The limit will be increased to £1million from 1st January 2019 which could assist the cash flow of larger clubs by reducing corporation tax liabilities.
The second and more welcome change is a new Capital Allowance regime for the cost of buildings and structures (SBAs) introduced from 29th October 2018. Previously no relief had been available for sports facilities other than any element that qualified as plant and machinery. The rate of SBA is 2% pa for 50 years. Facilities such as clubhouses, pavilions, changing rooms, artificial pitches, indoor and outdoor courts may qualify. The details of SBAs are not currently available, and clarification is being sought on the proposals which are described in HMRC's Technical Note12. Where a club has a new facility (e.g. an artificial pitch which it rents out to non-members) it will have taxable income and SBAs should reduce the tax it has to pay. However, the extent to which SBAs will have to be apportioned between non-taxable member use and taxable non - member use is as yet unclear.
Special tax status and using gift aid
The benefits of registration
In these difficult times, most clubs’ financial resources are stretched. Their financial position may be eased by registering with HMRC as a CASC or with the Charity Commission and HMRC as a charity. Registration confers
80% mandatory business rate relief
the ability to claim gift aid and gift aid small donations relief (GASDS) on donations
corporation tax exemptions
inheritance tax (IHT) reliefs.
CASCs and charities13 enjoy similar reliefs but the administration is more onerous for charities and continues to be so because of changes in charity law and Charity Commission guidance for Trustees. Often clubs which are incorporating are encouraged by their NGB to consider registration under either route at the same time. Alternatively, unregistered clubs often consider incorporation to provide limited liability protection without looking into registering. Unfortunately, unincorporated registered clubs will have to re-register for CASC or charity status on incorporation; many clubs have not appreciated registration cannot be transferred when doing so14.
Over the past year there has been a trend for registered clubs to establish wholly owned subsidiaries to comply with CASC or charity rules. These are effective corporation tax saving structures since profits otherwise subject to corporation tax in the registered club are earned by its subsidiary and can be donated tax free to its registered parent club. In order to ensure tax efficiency of the new structure where the parent club is a CASC it usually incorporates so that a tax group is formed for direct tax and VAT purposes. This will require the parent club to re-register under the new company name.
Relief for gifts
Anecdotal evidence is that gift relief has not been exploited effectively by registered sports clubs to date. Both Her Majesty’s Treasury (HMT) and HMRC are keen to see the take up increase significantly and improvements have been made to the law and practice to encourage this. Despite this, awareness of the available reliefs, of which there are three main ones, seems to be low in sport.
Gift aid - individual taxpayers making qualifying donations to a registered club can make a gift aid declaration so that if £100 is donated, the club can claim a tax rebate from HMRC of £25 and the individual donor can claim higher rate relief i.e. a rebate of £25 if he or she pays tax at the 40% rate. If the donor receives benefits as a consequence of his or her donation gift aid can be denied; however small benefits can be ignored and the rules for what is small have been eased from 6th April 2019.15
GASDS - this applies to qualifying cash donations (and contactless payments) to a registered club of £20 or less. This limit will be increased to £30 from 6th April 2019.Each donation qualifies for a 25% payment from HMRC. The conditions include an annual limit on the GASDS payments from HMRC of £2,000 and the requirement to be claiming at least 10% of the GASDS donations in gift aid donations in the year.
IHT - lifetime gifts and legacies in wills to registered clubs are exempt from IHT. With the rate of tax at 40% this can give rise to significant savings. In the case of a legacy the remainder of the estate on death may also qualify for the lower 36% rate of IHT if the 10% condition is fulfilled.16
HMT and HMRC continue to encourage the take up of gift aid where it is due and to eliminate erroneous claims where it is not. An example of a valid use of gift aid was provided by HMT Minister Robert Jenrick who confirmed that gift aid can be available on coffee mornings if the organisers on behalf of the charity or CASC ask for donations rather than charging for food and drink (see the news story published on 28th September "Jenrick: supports Bake Off fever"17).There are many other opportunities for getting cash back from HMRC using gift aid including sponsored walks, runs, auctions and reimbursing volunteer expenses so that the volunteer can make a gift aided donation of the money reimbursed.
As regards erroneous claims registered clubs should ensure that they have valid gift aid declarations (GADs) since the donor must have paid sufficient tax to cover all tax repayments made on his or her donations to CASCs and charities during the year. The increase in the annual personal allowance to £12,500 next tax year may have an impact on existing GADs which should be reviewed. If insufficient tax has been paid HMRC may pursue the donor for the tax that should have been paid by him or her and which has been reclaimed.
In the last year, there have been cases where erroneous claims have been made for payments associated with sports club subscriptions or participation fees. Some of errors seem to relate to the misreading of HMRC guidance where club treasurers have assumed that subscriptions paid by parents of children can claim gift aid on the child's subscription. The Government's high-level guidance states clearly that CASCs can't claim gift aid on membership fees. Unfortunately, it also seems to indicate that if membership of a charity is paid for a child the payment is accepted a gift and is eligible18. HMRC have confirmed that this is not correct. The sentence read alone is misleading since charity subscription payments must be for membership only not personal access or use of the charity's facilities or services, so most child subscriptions would not be eligible. Great care is required with gift aid and subscriptions in order to avoid future problems.
Invalid claims can be catastrophic and can arise because gift aid is an HMRC "pay now and check later" process. It may be a couple of years before HMRC's Compliance Officer visits the club to carry out a gift aid audit. The author has seen cases where as a result of a Compliance visit going back to previous years resulted in liabilities exceeding £100,000 for a club.
GASDS has not taken off as the Government and HMRC had hoped since it was launched in 2013. But if clubs think carefully about the scheme, they could generate up to £2,000 of cash from it each year. Examples that have been used successfully are:
where free refreshments e.g. tea and coffee are provided at a fundraising event, invite attendees to make a cash donation when they collect their free drinks;
put a collection box at the bar for spare change when people buy drinks;
cash collected at a funeral for the deceased's favourite charity or CASC.
IHT reliefs for gifts to registered clubs also seem to be overlooked. The author recently became aware of a case where a longstanding club member died leaving his estate, apart from a few relatively minor bequests, to the club which was a CASC. This was an example where the correct IHT treatment needed to be applied and the club secretary correctly used the CASC relief from IHT to save the club £50,000 of IHT which would otherwise have been due.
Value added tax
VAT is a complex and costly tax for clubs since mistakes are easily made. There have been two major VAT developments of concern over the last year; the imminent mandating of Making Tax Digital for VAT and the zero rating of the construction costs of new sports buildings.
Making tax digital
Making Tax Digital (MTD) for Business is the Government's initiative to make business taxpayers move over to digital record keeping and tax return filing. The first stage of this is MTD for VAT which affects all sports clubs compulsorily registered for VAT with Vatable turnover above the VAT threshold of £85,000 pa. It will be introduced generally from 1st April 2019.Those affected will have to use software to maintain their VAT records and send quarterly VAT returns to HMRC. The software must be compatible with HMRC's requirements. Paper records will no longer be acceptable for VAT.
A small minority of VAT registered businesses with more complex requirements may be able to defer implementation until 1st October 2019.These will include unincorporated not for profit organisations and those within VAT groups. HMRC are currently identifying those businesses and say they will be writing to them before the end of 2018. Those not deferred are also being written to by HMRC so that they can join the current HMRC pilot now and be ready for the deadline of 1st April. Deferred businesses will be able to join the pilot in Spring 2019.
All clubs should review whether they have to comply with MTD for VAT now (even if they are granted a deferral). If MTD for VAT applies review the requirements with the club's accountants and software provider as a matter of urgency so that the club will able to comply by the deadline.
Zero rating of buildings
The Eynsham Cricket Club (ECC) case is progressing19. This concerned a cricket club, a CASC, which claimed zero rating relief on the construction cost of its new pavilion and which was used by the club and the local community. The 2017 decision of the First Tier Tribunal (FTT) to deny relief has been appealed and is likely to go to the Upper Tribunal in mid-2019. The FTT found that although ECC was registered as a CASC it was also a charity for tax purposes but the "village hall" conditions for zero rating were not satisfied since the club was not established for charitable purposes only. HMRC's view remains that CASCs cannot also be charities for tax purposes so hopefully the UTT's view should clarify the matter.
The potential danger of ignoring HMRC's position on the availability of the charity zero rating relief for the construction of a building was illustrated by the recent Marlow Rowing Club case20. The club, a registered charity, had issued a zero-rating certificate to its contractor in relation to the construction of a "Water Sports Hub" since in its view it was intended to be used for a relevant charitable purpose otherwise than in the course or furtherance of a business. The club was aware that HMRC did not agree with this; at the time its interpretation was being litigated elsewhere21.
HMRC won the other litigation, following which Marlow conceded that zero rating relief was not available. HMRC took Marlow to the FTT seeking penalties on the grounds that it did not have a reasonable excuse for issuing the zero-rating certificate. HMRC have recently won before the FTT and the club could be worse off than it would have been had it accepted Vat was due at the time.
Registered clubs should accordingly take great care in claiming the zero rating of new sports buildings. HMRC's view is that relief is only available for charities and then in restricted circumstances.
Employment-related tax matters
Determining employment status for tax, National Insurance Contribution and National Minimum Wage purposes has been the one of the biggest challenges facing clubs in 2018 creating uncertainty for treasurers. HMRC continue to dispute payments to many “self-employed" individuals arguing that PAYE is due because in reality the person is an employee. Clubs may find HMRC's "Check Employment Status for Tax" tool helpful although this should be used with care since it requires a reasonable degree of sophistication and understanding of the underlying case law tests.
Government has recognised the lack of clarity here and in February 2018, in response to Matthew Taylor's independent review of employment working practices published “Employment Status Consultation” seeking comments on possible reform. The Consultation paper set out the current legislation and framework including discussing employment status and tax, the difficulties which arise and some options for change including changes in the legislation and providing better tests. The Consultation closed on 1st June 2018 and the Government has just set out its plan of action to respond to Taylor's recommendations22. This will include aligning the tax and employment rights frameworks and legislating to improve the clarity of employment status tests. Future changes can therefore be expected.
One example of where status for tax has been tested in the Courts during 2018 is that of football referees at the highest levels23. The referees in this case had a contract with [PGMOL] annually for the football season but the two parties agreed "you are not an employee". The referees had to adhere to certain rules in providing their services. The FTT held that the referees were self employed and were not under a contract of service since
there was no mutual obligation with PGMOL to provide or accept work, and
referees were not controlled by PGMOL.
Hopefully HMRC will accept defeat with good grace and not seek to attack officials in other sports.
The taxation of expenses payments continues to attract attention from HMRC, which has issued news stories or guidance on
Corporate Criminal Offences and not for profit clubs
A new Corporate Criminal Offence of "Failure to prevent the criminal facilitation of tax evasion" has been introduced which will impact on all sports clubs which are constituted as companies. Companies limited by guarantee, community interest companies, charitable incorporated organisations and community benefit societies of whatever size are probably unaware of the action they need to take. Directors need to review their procedures for ensuring employees, volunteers or the company's agents do not assist in someone else's tax evasion. Reasonable procedures need to be in place and documented in a risk assessment by the club and its directors to prevent this happening. Failure to do so can result in severe financial penalties, director disqualification and reputational damage. Incorporated clubs should take immediate action using the Government guidance on this which HMRC have issued27.
Sports clubs must regularly keep abreast of developments in tax in order not to miss opportunities and to minimise tax risk. In the current environment treasurers of all but the smallest clubs need an awareness of tax with access to professional advice in order to achieve this.
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- Tags: Amateur | Charity | Community Amateur Sports Clubs (CASC) | Corporate Criminal Offences | Corporation Tax | Employment | Finance (No_ 3) Bill | Finance Act 2018 | Gift Aid | HMRC | HMT | Value Added Tax (VAT)
- Key UK tax law developments for not-for-profit sports clubs in 2017/18
- A Guide to Club Structures for Semi-Professional and Amateur Sports Clubs
- Investing in the next generation: An overview of the new UK corporation tax relief for grassroots sport
Richard Baldwin MBE; FCA; CTA; B Com (Sports tax consultant)