Key UK tax law developments for not-for-profit sports clubs in 2017/18
Published 14 December 2017 By: Richard Baldwin MBE; FCA; CTA; B Com
Tax can have an important impact on the finances of not-for-profit sports clubs.1 But keeping up to speed is difficult as tax law and Her Majesty’s Revenue and Customs (HMRC’s) practices are constantly changing. This article highlights recent developments for not-for-profit sports clubs, explaining some of the pitfalls and pointing out opportunities for clubs to generate cash. Specifically, it looks at:
Employment related tax matters (PAYE, NIC, National Minimum Wage);
Value added tax
Special tax status
Making Tax Digital for business
Readers should note that this piece builds on this author’s previous LawInSport article: A guide to complying with UK tax obligations for community and amateur sports clubs 2
The environment for not-for-profit sports clubs continues to be difficult. Not only do clubs face more complexity and issues with the tax system, but they are also exposed to a greater administrative burden in other areas such as data protection, safeguarding, corporate governance and auto-enrolment to provide pensions to their employees to name but a few. Many treasurers are considering incorporation to protect themselves from personal liability specifically in relation to tax. The Rugby Football Union has for some time recommended 3 its member clubs to incorporate and many have done so. This is certainly worthwhile for larger clubs.
The tax environment generally has become more onerous since the author’s previous article for LawInSport in October 2015,4 with more legislation and more HM Revenue & Customs guidance although some tax reliefs have been introduced or improved. We have had a General Election this year resulting in 2 Finance Acts; the latest Finance (No. 2) Act 2017 recently received Royal Assent and ran to over 670 pages. Many of the new tax measures have been subject to prior formal consultations by HMRC who do not always reflect the views of professionals in the law they produce. An example of this is HMRC's approach to Making Tax Digital where it is imposing additional VAT reporting obligations on community amateur sports clubs (CASCs) and charities (see below).
There has been a complete change in HM Treasury Ministers 5 and HMRC senior management has been re-organised; Inspectors of Taxes at the operational level who were familiar with sport's tax issues have often moved on to other posts taking with them their sports knowledge base. A major theme of HMRC's work continues to be tackling tax evasion and avoidance. The latter, although not illegal, is regarded by Government as unacceptable and it has introduced measures to discourage it. Politicians sometimes seem reluctant to appreciate the difference between illegal tax evasion and legal tax avoidance, and this is creating real difficulties for professional advisers. HMRC is under great pressure to collect more tax and specifically to narrow the budget deficit.
All these changes have not helped ease the tax burden for not-for-profit sports clubs. Professional sports clubs have also been under the microscope from HMRC with football clubs facing tax challenges on image rights contracts, agents’ fees and the application of the national minimum wage and the tightening of the taxation of testimonials and termination payments.6 HMRC is also pursuing a case involving a criminal investigation of suspected tax evasion.7
Not-for-profit sports clubs continue to face pressure in all the main tax areas of PAYE, NIC, VAT and corporation tax. Tax is, in the author’s view, far too complex for the club treasurer of any but the very smallest club, with VAT making life particularly difficult. There is generally a high level of tax complexity with generally a low-level understanding at not-for-profit sports clubs. HMRC compliance visits can cause difficulties resulting in unaffordable settlements in favour of HMRC.
Unfortunately, things are unlikely to get much better with changes on the horizon such as the introduction of “Making Tax Digital 8” for clubs, which will increase the administrative burden for the volunteer treasurer. This is despite the long-held view of professional organisations such as the Institute of Chartered Accountants in England and Wales (ICAEW) that the government should seek in the long run " to achieve a UK tax system that was simpler, easier, fairer and more attractive to business."9
Government remains keen to encourage grass roots sport through the tax system and is taking some steps to do so. Below, we investigate what these steps are and touch on other developments in the space, whilst also re-enforcing some points in the author’s previous article 10 on difficulties and opportunities facing not-for-profit sports clubs in the current environment.
Employee related tax matters
Issues relating to pay-as-you-earn (PAYE), national insurance contributions (NIC) and national minimum wage (NMW) continue to cause concern for sports clubs; specifically, self-employed status challenges are constantly in the news focussing attention on the exposure to broader employment related liabilities not only tax. There are also other changes clubs should be aware of.
In the last 2 years, there have been significant changes in the taxation of employee benefits and expenses area which include:
the abolition of the £8,500pa threshold for reporting employee benefits and expenses so that all employees are subject to reporting irrespective of their annual earnings from 2016/17. 11
the introduction of a statutory exemption for trivial benefits in kind from 6th April 2016. Subject to conditions, if the annual cost of providing the benefit to an employee does not exceed £50 it is exempt from income tax.12
replacing the expenses dispensation system with an exemption from reporting non- taxable expenses paid or reimbursed by employers for 2016/17 onwards.13
the introduction of a voluntary system of pay-rolling benefits in kind.14
In 2017 HMRC have consulted on the taxation of employees’ business expenses.15 As a result of this consultation there will be no fundamental reform but relatively minor changes will be introduced in response to taxpayers’ concerns. However, HMRC, in consultation with external stakeholders, is going improve its guidance on employee expenses particularly on travel and subsistence and the process for claiming tax relief on non-reimbursed employment expenses. Hopefully the improved guidance will be helpful to clubs.16
Determining employment status continues to be the most difficult PAYE area for clubs and this can create material uncertainty for treasurers. Self-employed status is under constant attack from HMRC, who are particularly focussed on individuals who are described as self employed but are almost exclusively providing their services to one client. As far as the author is aware, the Government is concerned that individuals are not receiving employment related benefits such as sick pay and pensions and that income tax and national insurance contributions are being lost.
The author is aware that HMRC are currently challenging the self-employed status of football referees at the higher levels and this dispute may well end up in the Tax Courts. Such an attack could, in the author’s view, spread to other sports. For example, employment status may also be difficult to determine for club coaches, physiotherapists, stewards, trainers, bar staff and grounds men. Clubs who pay individuals for such services on a self-employed basis should review this status as a matter of urgency, taking appropriate professional advice, to ensure that this treatment is robust. The Government continues to review status issues. Matthew Taylor (Chief Executive of the Royal Society of Arts) and his team were asked by Government to review modern working practices, and produced their report in July 201717. The report was produced with the overriding objective of trying to ensure that: "[a]ll work in the UK economy should be fair and decent with realistic scope for development and fulfilment."18 As part of its response to this review Government is to publish a discussion paper exploring the case and options for longer term reform to make the employment status tests for both employment rights and tax clearer. Clubs should therefore watch this space.
Clubs may pay only reasonable and properly documented out of pocket expenses but nothing more to their players and volunteers. Fortunately, if these individuals do not have a contract with the club HMRC is unlikely to regard them as employees for tax and NIC purposes.19 However great care is required to ensure that any expense payments are reasonable and accurately supported; the payment of a round sum expense allowance on a regular basis without reference to the expenses actually incurred by the player or volunteer is likely to create an employment for PAYE purposes. In this instance, the club will be responsible for paying over the income tax and NIC which should have been deducted so club treasurers beware.
In addition to their PAYE Control visits HMRC are often checking a club's compliance with the NMW. Not only is there a cost if the NMW requirements are not met but HMRC also "name and shame " employers who haven't complied. The treatment of travelling time after arrival at the club e.g. for away matches continues to create difficulties for NMW purposes. However genuine volunteers with no contractual obligations and receiving properly reimbursed and supported expenses should not be within the scope of NMW. Clubs which have not reviewed their compliance with NMW recently should do so soon.
Value added tax (VAT)
VAT is a costly and complicated tax for not-for-profit sports club treasurers to deal with. Whilst in concept it may seem simple because a club merely collects VAT on its invoiced supplies and offsets it against VAT paid on its purchases in practice it is far from simple. Not all supplies are VAT-able and not all VAT which the club pays is offsettable. The administration of VAT can provide a challenge for clubs firstly, because returns are filed online and secondly, because most sports clubs are partially exempt which means its VAT calculations can be complicated. Not surprisingly mistakes are often made.
Registration for VAT is mandatory where a club's taxable turnover (that is its income subject to VAT at the zero and standard rates) exceeds £85,000 pa20. It has just been confirmed that this registration threshold will be retained at its current level and will be fixed for the next two years from April 201821. If a club is below this limit VAT will not be chargeable on its income but it cannot recover any VAT that it pays. Thus, if an unregistered club buys new equipment it will cost it an extra 20% in VAT.
Special treatment applies to charges to members and non-members for participating in sport which are exempt from VAT22 and do not count towards the registration threshold. Also, income from one off fund raising events may be exempt23. However, bar income is subject to VAT at the standard rate so many of the larger clubs do have to register and become partially exempt giving rise to partial recovery of VAT paid. The extent of partial recovery can be the subject of disputes with HMRC.24
Case law is constantly impacting on VAT liabilities and recoveries so it is important to keep an eye on developments. Two recent cases are worthy of mention; the first dealing with what is "sport" for the purposes of the VAT "sport" exemption; and the second, on VAT charges imposed on the construction of a new sports pavilion:
the English Bridge Union argued that contract bridge was a sport for the purposes of the sport exemption under the UK's VAT Act 1994 . Its case was referred to the European Court of Justice for its opinion as to whether it was a sport for the purposes of the relevant EC Directive which the UK should follow. The Court found that since the activity had a negligible physical element it was not covered by the concept of sport25. This decision confirmed HMRC's view. For a full review of this case, please see: Is bridge a sport for VAT purposes? The ECJ's decision in English Bridge Union v. HMRC .26
Eynsham Cricket Club constructed a new pavilion which was completed in 2015 replacing one which had burned down. The club was registered as a CASC with HMRC and claimed that the pavilion's construction cost should attract VAT at the zero rate because it was within the "village hall" zero rating relief for charities. HMRC had argued, among other things, that the club was not in any event a charity (because it was a CASC) and that the club was not within the village hall relief provisions. The Tribunal found interestingly that the club was a charity for tax purposes but did not satisfy the village hall relief conditions since it was not established for charitable purposes only27.
The latter case demonstrates the importance of VAT in costing facility improvement projects. Even if the project is part funded by one of the Sports Councils (Eynsham CC was partly funded by Sport England) there is no guarantee of favourable VAT treatment. Indeed, it seems perverse that what amounts to a Government grant is in effect recaptured through the tax system (which this one was). The author’s steer to clubs is to engage a VAT specialist before embarking on any substantial capital projects to ensure that VAT is properly budgeted for and recovered wherever possible.
Many VAT issues will be picked up by HMRC VAT compliance visits so clubs should take great care in dealing with VAT, filing accurate and timely returns with adequate supporting records and accounts.
Corporation tax (CT)
The author continues to get enquiries from clubs concerning their CT obligations. Many treasurers are still unaware that a club may be liable to CT on its non-member income such as from the bar, sponsorship, rental and interest income. Practical difficulties often arise in relation to bar income since HMRC will only accept that income from members is not taxable and regard income from non-members, which includes visiting teams, as taxable trading income. Whilst some expenditure can be offset against taxable income this may be limited leaving profits chargeable to CT. The fact that the annual accounts do not show a surplus is not strictly relevant. Indeed, many clubs seek to generate surpluses from non-member sources to keep them afloat or at least enable them to provide sport to the local community at a reasonable cost thus exposing them to a CT bill.
All the comments in the author’s previous article 28 concerning taxable profits, deductions, and the treatment of "small" clubs hold good today although the Government has reduced the CT rate from April 2020 to 17% from 18%29; it is currently 19%. CT administration remains an arduous task for the club treasurer because of the need to identify taxable income (ignoring mutual income from members) and allocating tax deductible expenditure to that income. One new development potentially is the possible simplification of CT. The Office of Tax Simplification (OTS) produced a report with a wide-ranging review of measures designed to simplify the overall CT process30. It will be interesting to see how this is taken forward.
One recent change which may help clubs reduce their profits subject to CT was introduced in the Finance (No.2) Act 2017 which received Royal Assent on 16 November31. Clubs can from 1 April 2017 claim a corporation tax deduction for payments of qualifying expenditure in respect of grass roots activities. Qualifying expenditure is broadly expenditure incurred for charitable purposes which facilitates participation in eligible amateur sport.32
There are detailed provisions33 and conditions for claiming this relief which sports clubs should be able to satisfy. If they do they will be able to claim a deduction for qualifying payments up to £2,500pa which, if they are liable to pay corporation tax, can save a maximum of £475pa currently. Companies making contributions to a sports club to be spent on qualifying expenditure will also get relief up to the same limit. There is no limit on the number of corporate patrons a club can have so the new relief may make project funding easier. Club treasurers should read HMRC guidance on this new relief when it is available to see how they might use it.
Special tax status
Registration as a charity or CASC continues to be of interest to not-for-profit sports clubs with an estimated 10,000 clubs currently registered, the majority as CASCs. Registration provides 3 major benefits: 80% mandatory business rates relief, corporation tax exemptions and the ability to use gift aid. Charitable tax reliefs are better generally than those for CASCs but charities carry with them additional administration due to compliance with Charity Commission requirements 34. Rate relief is the same for both types of registration but there are slight differences in the other two reliefs35.
Under both types of registration, it will usually be necessary for the larger club to set up a trading subsidiary to conduct its non-sporting activities such as the bar. One of the main benefits of this will be to ensure that the profits from these activities are free of corporation tax. In addition, no tax should be paid on taxable profits in the club itself such as interest and rental income, capital gains and income from the club's sporting activities. In all cases, however, in order for tax exemption to be available to the club, its exempt profits must be applied broadly for qualifying sporting purposes.
For more information on registering a sports club as a charity or CASC, please see: Grassroots sport: A guide to registering as a charity or a community amateur sports club 36.
Gift aid is used by many registered clubs generating a 25% tax rebate to the club on qualifying individual donations37. So, a qualifying donation of £100 towards the cost of new changing rooms to be built by a registered club will enable it to claim £25 back from HMRC. If the individual pays tax at the 40% rate he or she will also be able to claim £25 personally from HMRC. The "buy-a-brick" scheme,38 and other similar schemes, can be used to generate donations for facility improvement projects provided the donor benefit restrictions are avoided. In order to claim gift aid, an individual needs to be paying tax and sign a gift aid declaration (GAD). HMRC have published an updated model wording 39 for GAD's which should be used after 1st April 2016.
The author is often asked whether club subscriptions qualify for gift aid. The answer is that they do not generally qualify and are specifically prohibited for CASCs40. An annual subscription to a charity with separate charges for participation may be eligible for gift aid.41 There are however many other opportunities for claiming gift aid, and HMRC are keen to encourage take up. It has recently set up a Working Group with external stakeholders such as the Sport & Recreation Alliance to consider the effectiveness of the relief and possible areas for improvement with a view to, among other things, increasing the take up by eligible donors. There will be more information on this over the next year.
Finally, the Gift Aid Small Donations Scheme (GASDS) should not be overlooked42. The conditions for qualification have recently been simplified and the maximum rebate increased to £2,000 pa. For a registered club to access GASDS it must be claiming gift aid in the tax year; GASDS is however much simpler since it does not require individual gift aid declarations to be completed by the donor. Individual cash donations of up to £20 qualify (subject to conditions) for a 25% cash payment from HMRC. This applies to "bucket" collections and similar fund raising targeted at small cash donations.
Making Tax Digital (MTD)
The Government's intention for taxpayers to move over to digital record keeping and tax return filing has been discussed and consulted on for some time. Unfortunately, this is becoming a reality for some clubs. The background to this is that Government believes that digital record keeping and reporting will simplify taxation assessment and reporting and will keep taxpayers more informed and up to date with their tax obligations. MTD reforms the accounting and reporting systems for businesses and will involve the adoption of specialised software and quarterly reporting of financial results online to HMRC. Far from simplifying taxation for all sports clubs in the author's view it will create additional administrative burdens and costs for clubs many of which do not keep their accounts and records digitally. Legislation has recently been passed to enable this specifically for VAT which will be followed by Regulations43. Businesses with turnover above the VAT threshold of £85,000pa will be required to use MTD from April 2019 for VAT purposes.
Unfortunately, the exemptions proposed by the Government when it consulted on MTD for CASCs and charities have not been carried forward into this legislation, so sports clubs which are VAT registered will have to deal with MTD from that date. The process for doing so is still unclear and time is running out. HM Treasury have stated 44 that the scope of MTD will not been widened before April 2020. This is an area for clubs to watch carefully since there is likely to be further announcements and HMRC consultation on MTD for CT purposes.
Much has happened in the last 2 years but not all of it bad. There are opportunities for clubs to raise much needed cash through the tax system, but simultaneously threats to clubs if they get tax compliance wrong. These threats include additional club liabilities for under paid or late payment of tax and late filing of returns in any of the above areas and interest and penalties thereon. There may also be adverse publicity and reputational damage which can follow. In addition to potential personal liabilities for the Treasurer and Management Committee of an unincorporated club, there is the administrative burden of dealing with the taxation particularly if errors are made. Treasurers and club advisers should pay close attention to tax matters and optimise the club's tax position; hopefully this contribution helps them to do so.
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- Tags: Community Amateur Sport ClubS (CASC) | HMRC | Income Tax | National Minimum Wage | PAYE | Tax | UK | Value Added Tax (VAT)
- A guide to complying with UK tax obligations for community and amateur sports clubs
- Grassroots sport: A guide to registering as a charity or a community amateur sports club
- A Guide to Club Structures for Semi-Professional and Amateur Sports Clubs 2015
Richard Baldwin MBE; FCA; CTA; B Com (Sports tax consultant)