A guide to complying with UK tax obligations for community and amateur sports clubs
This article explains the principal tax obligations facing community and amateur sports clubs in the UK and offers tips on how best to avoid common problems that arise with HM Revenue & Customs (HMRC).
HMRC’s current approach - a wake up call to treasurers!
The message for sports clubs and club treasurers is clear: ensure you are complying with the requirements of the main taxes impacting on clubs, namely:
- Income tax (PAYE) and national insurance contributions (NIC);
- Value added tax (VAT); and
- Corporation tax (whether or not the club is incorporated)
before HMRC pay you a visit. If your club hasn't had any contact with HMRC recently the chances are it will be approached sooner rather than later - the Treasury has a huge hole in its finances that it needs to fill and clubs may be an easy target.
Clubs should prepare their defences now. We will examine each of the above taxes in turn and go over top tips for avoiding common pitfalls.
PAYE and NIC
HMRC is concerned with the correct application of PAYE and NIC by sports clubs on payments to all of the persons who are involved with the club.
The issue caught the headlines on 28 May 2013, when the Telegraph reported: The local cricket clubs bowled over by HMRC tax bills, referring to a PAYE inquiry into Sawbridgeworth Cricket Club. Whilst the club had "friendly" negotiations with HMRC, the bill for back tax and interest going back to 2008 was according to press reports almost £15,000.1
Problems like this happen principally because of the burden imposed on the club treasurer, who is often a volunteer, of having to try to apply complex PAYE and NIC rules that require them in the authors experience to be responsible for:
- Collection and payment of PAYE and NIC to HMRC in relation to employees;
- Completion of forms and returns including those in relation to expenses and benefits; and
- Ensuring “employees” (see below) necessarily are paid in accordance with the national minimum wage (NMW) rules.
A club’s payroll
HMRC now has a Real Time Information2 (RTI) system, requiring the club's payroll to be online and providing payroll details to HMRC as salary payments are made to employees throughout the income tax year.
Many treasurers will be uncomfortable with this and may decide to sub-contract the processes out to a payroll services agency. The point to note is that this doesn't relieve him or her from dealing with difficult issues which may very well trip the treasurer up such as determining appropriate employment status, casuals, benefits and perks and reimbursing expenses.
Determining a person’s employment status
Determining someone's employment status is probably the most difficult area to deal with when deciding whether to apply PAYE or not since the “supplier of services” (i.e. the relevant person) will often say they are self-employed.
Employment status is particularly important for coaches, doctors, physiotherapists, stewards, trainers, bar staff, grounds men, players etc. Often there is no simple answer; indeed the Government's Office of Tax Simplification produced a 188-page report in March 2015 on this subject, which in the author’s view did little to help.3 For tax purposes there are broadly three categories of individual who the club may pay for work done:
- Self employed; and
- Volunteers, who are neither of the above and who receive nothing more than reimbursement of their out of pocket expenses (see the treatment of some non-contract players below).
It is vital to decide which category an individual falls into.
It is also important that clubs always make up their own mind as to the relevant employment status of any given person, since if they get it wrong it is they who will be liable to HMRC for paying the PAYE and NIC that should have been deducted (as opposed to the individual supplying their services).
In practice a club needs to look at the facts and circumstances of each case, not just what the agreement between the club and the individual says. It is possible to develop a simple checklist of the relevant criteria that will assist in decision-making. These would include:
- Can the club control how and where the individual does things?
- What financial risks does the individual take e.g. does he or she have other clients, receive a fixed fee rather than an hourly rate and have their own insurance?
- Can they send a substitute if they are unable to do work?
- Is the individual part and parcel of the club's organisation e.g. do they have a club email address or manage club staff?
This should be completed and kept on file to assist with any HMRC enquiry. HMRC also has some information on its website including an Employment Status Indicator tool4 that may help clubs determine whether the individual who is engaged is an employee for tax and NI purposes.
Casuals are within the PAYE/NIC net if they are employees despite only working for the club for a short period. The usual status criteria will need to be applied to determine employment status to persons one may consider in this category. Casuals would normally cover individuals who do work for the club on an occasional basis when needed such as bar stewards or cleaners and often include students helping out during holidays.
Are players necessarily employees? "The love of the game" rule
Players do not necessarily have to be regarded as employees. Some clubs will pay their players only out of pocket expenses to cover genuine travel and other related costs of training and playing. These players will not usually be required to have a contract with the club under the club's internal sports rules. In such cases, it may be possible to establish that the players are playing "for the love of the game" and do not become employees subject to PAYE, NIC and NMW.5 This cannot be taken for granted however, since proper procedures must be put in place to ensure that only reasonable bona fide expenses actually incurred are reimbursed on a specific not "round sum" basis. Appropriate documentation supporting this is essential.
Reporting of benefits and expenses
Clubs can often get reporting of expenses and benefits wrong which again can result in HMRC claiming back tax and NIC. The rules are changing; clubs don't need to report the reimbursement of business expenses from April 20166 but clubs will still need to check what is reportable. Income tax will need to be paid by the employee on reportable non-business expenses and benefits but this may be avoided in certain cases if the club enters into a PAYE Settlement Agreement (PSA) with HMRC under which the club settles the employees liability.7
What to do if HMRC make contact and errors are found
HMRC regularly make control visits or audits to confirm that clubs are complying with their obligations for PAYE and NIC. When the club gets a letter from HMRC advising of such a visit or requesting detailed information it should contact its professional advisers first and consider carrying out its own review of PAYE compliance before allowing HMRC to do a detailed review.
If there have been errors, it should prepare its own calculations and supporting documentation. This will give it a stronger base for negotiating a settlement with HMRC whose initial calculations should be challenged and not just accepted. Having agreed a settlement (which will include interest on unpaid tax and possibly penalties) clubs should seek a deferral of payment e.g. by instalments.
Finally put matters right for the future. If you haven't had a PAYE Audit visit from HMRC within the last 3 years prepare yourself now and ensure your PAYE is in order.
National Minimum Wage
Clubs should pay the National Minimum Wage (NMW) to employees in compliance with NMW and its supporting rules,8 which is actively monitored by HMRC. HMRC's attention to this is likely to be more focussed with the planned increases and introduction of the National Living Wage for those over 25 from next year. HMRC carry out control visits to ensure compliance and are investing an additional £1million in 2015/16 to improve compliance.
NMW applies to "workers" which would include the club's employees. Difficulties can arise when individuals receive benefits or expenses payments in excess of what is considered reasonable. NMW issues can also arise with hours worked by employees when travelling to matches or competitions away from the club. Genuine volunteers with no contractual obligations who only receive reasonable and properly controlled reimbursed expenses are unlikely to be within the scope of NMW. Clubs should review NMW compliance with this is mind.
Top tips for dealing with PAYE and NIC
- Confirm that the service provider really is self-employed – confirm his or her status for PAYE.
- Take great care with casuals -they are usually employees.
- Do volunteers only receive reimbursement of specific expenses? If they receive more they may be treated as employees.
- Check the club is complying with the NMW rules; volunteers may be workers eligible for NMW.
- If HMRC want to do an audit or control visit prepare yourself before you let them in.
VAT is not a "simple tax" as the Government of the day said when it was introduced and is probably the most costly tax of all for grass roots sport principally because it penalises clubs that choose to improve their facilities.
Examples of problems
The author is often asked questions like "The club has spent £4,800 including £800 of VAT on mowing equipment - will it get this back?". Unfortunately the answer for those clubs that are not registered for VAT is quite simple - no you won't get it back - it is an additional cost of purchase. Even if the club is registered, VAT recovery on the cost is likely to be restricted or even non-existent.
VAT is not well understood by the treasurers of community sports clubs. This can have disastrous consequences.9 The author is aware of at least two unincorporated sports clubs not registered for VAT facing extinction because they instructed building contractors not to charge VAT on new clubhouses and HMRC is now asking for that VAT. In both cases the members of the club committee that authorised this have left the club and the new committee, or more likely the treasurer, faces potential personal liability for the debt.
The clubs were relying on a VAT rule that allows the zero-rating of the cost of new buildings constructed by charities provided certain conditions are met, one of which is the so-called "Village Hall" relief.10 Unfortunately HMRC interpret this rule very narrowly, have shown little sympathy for the clubs and are likely to succeed in their argument enforcing recovery of substantial amounts of VAT that neither club can afford to pay.
The mechanics of VAT
So why is VAT such a difficult and costly tax for sports clubs which are trying to improve their facilities and are penalised by doing so? To explain this the mechanics of VAT need to be understood. If a club's taxable turnover exceeds £82,000pa11 it must register for VAT with HMRC whether incorporated or not. Once registered, this will involve:
- Charging VAT at the appropriate rate on its taxable supplies of goods and services;
- Deducting from that allowable VAT on purchases of goods and services; and
- Accounting for the net VAT due.
This will involve electronic filing of VAT returns, record keeping and dealing with the additional administration that VAT brings.
Identifying taxable supplies
Clubs will need to identify different types of taxable supplies and what rate if any they attract.
Exempt supplies are particularly important for sports clubs. Thus special treatment applies to charges to members and non-members (the latter from 1st January 2015) for playing sport that are exempt from VAT and do not count towards the registration limit.12 Also income from one off fund raising events organised by non-profit distributing sports clubs may be exempt from VAT.13 However some clubs have other taxable income which takes them above the registration limit e.g. from their bar, so that they have to register.
Exempt playing charges and fund raising income can be a mixed blessing since whilst charges are lower, recovery of VAT on purchases under the VAT "partial exemption" rules is reduced. Avoiding paying VAT in the first place can help VAT recovery and this may be possible where the club pays charges for the letting of its facilities which will be exempt if the agreement is for a series of 10 lets or more and certain other conditions are met.14
VAT on purchases of goods and services which generate taxable income e.g. bar equipment are fully recoverable and those relating to exempt income e.g. sporting equipment are not recoverable at all. Overhead expenses that help to generate both exempt and taxable income are partly recoverable under partial exemption that requires a detailed calculation to ascertain the recoverable VAT. However, there is a minimum level of exempt input which can be recovered provided it is not more than £625 per month on average and half the input VAT for the period. If this is the case full recovery can be obtained.15
Substantial works to facilities
It can be appreciated that a club spending substantial amounts to improve its facilities e.g. by building a new clubhouse, is unlikely to recover all of the VAT on the construction cost hence the desire for charitable clubs to avoid this by not paying it in the first place using the zero rating relief noted above for new buildings.
Few clubs are registered charities so face the prospect of having some non-recoverable VAT on the cost. Treasurers do not always appreciate this when budgeting for capital projects that are often part funded by grants so they end up with a funding shortfall when it is too late to do anything about it.
The message here is vital: factor in any potential VAT cost at the beginning of the project and make this clear in the club's grant application. Great care is required with facility improvement projects and partial exemption and clubs may find it useful to consult a VAT specialist.
VAT compliance checks by HMRC can generate substantial back VAT, interest and penalties for HMRC so clubs should take great care in dealing with VAT, completing VAT returns accurately and on time with adequate supporting documents and record keeping.
Top tips for dealing with VAT
- Generally only register for VAT if taxable income exceeds £82,000pa (excluding VAT exempt income from sport).
- Remember if the club is not registered it cannot recover any VAT that it pays on purchases.
- Take care when budgeting for new facilities or equipment since the VAT paid may not be fully recoverable.
- Use the minimum limit for VAT recovery on costs of £625per month where possible if the club is registered and partially exempt.
- Even if the club is a charity it may have to pay VAT on a new clubhouse.
Corporation Tax (CT)
Clubs are subject to CT whether they are incorporated or not
The potential importance of this to club treasurers was brought home to this author when receiving a call from a practising lawyer who had recently been appointed as club treasurer. He was worried that on taking up his new position he could find no evidence that the club had looked at its corporation tax position and had had no contact with HMRC.
Of course he was right to be concerned; clubs are subject to CT whether they are incorporated or not and clubs must register with HMRC and file CT returns online if HMRC requests them to do so or if they determine themselves that they have taxable profits.
Generally there are no special exemptions unless they are registered as a charity or a Community Amateur Sports Club (CASC – see below) with HMRC. However, if the clubs Club's expected annual CT liabilities are small (see below) HMRC may agree to treat the club as dormant.
Identifying income and gains
Clubs need to identify sources of income and gains that are liable to CT but are allowed to deduct the costs of earning the income and gains under the normal CT rules. Member income is generally not taxable but that from non- members is although this can be a difficult area and will depend on whether the club is trading. HMRC devote many pages of guidance to its Inspectors on this.16 Gains from the sale of capital assets are also generally taxable. Taxable sources of income and gains would normally include-
- Investment income e.g. interest on deposits with the bank
- Income from property e.g. rental income
- Trading income from non-members e.g. from bar and food sales
- Capital gains e.g. from the sale of club land
- Regular fund raising events
Exemptions and reliefs (capital allowances)
Grants are generally exempt from CT where no goods or services are provided in return for the grant.
Tax relief is available for the costs of buying plant and equipment used to generate taxable income e.g. bar equipment to service non-member bar sales. The relief, known as capital allowances, may be quite valuable in the case of a facility improvement project with a large budget. Unfortunately no relief is available for the construction costs of a new clubhouse apart from any element of plant and equipment. In the case of large capital projects it will be worth taking advice from the club's accountant.
Corporation tax payable
If the club has taxable profits (after deducting allowable expenses) having done its calculations it will be charged 20% CT on those profits currently with plans by the current Government to reduce the rate to 18% from 2020. Unfortunately the so called "nil rate" band of CT whereby no CT was charged on annual taxable profits of £10,000 and under has long since disappeared so there is no automatic safety net threshold, taxable profits below which HMRC are not interested.
Clubs that have to file CT returns online have 12 months after their accounting year-end to do so using an HMRC specified format. Any tax that is due must be paid earlier; nine months and one day from their year-end. Failure to comply with these requirements can result in interest charges, the payment of CT for previous years and penalties.
HMRC are aware that many clubs are not meeting their CT compliance obligations and the author was delighted to receive the new club treasurers call detailed in the opening paragraph and help him by taking advantage of HMRC's concessionary treatment of some "small clubs".17 HMRC may treat such clubs with small tax liabilities as dormant for CT purposes and thus exempt from the requirement to file CT returns and pay CT where-
- the club's annual CT liability is not expected to exceed £100, and
- the club is run exclusively for the benefit of its members.
Where the club contacts HMRC and shows that these conditions are met HMRC will not send a "Notice to deliver a company tax return" and will treat the club as dormant. This is then reviewed by HMRC at least every 5 years. I helped the treasurer draft and send a suitable letter to HMRC who confirmed that his club was to be treated as small; the treasurer was able to sleep at night!
Top tips for dealing with CT
- If the club has non-member income it may have to pay CT.
- Interest, property income and capital gains are all taxable and should be reported to HMRC.
- Maximise the costs that can be deducted to minimise taxable profits- use HMRC guidance to do this.
- Take particular care with substantial spending on facility improvement; the club may be liable to tax on the increased income but may get allowances for plant and equipment.
- "Small clubs" which have never filed CT returns should consider approaching HMRC to confirm this status.
Special status for tax purposes
The advantages of registering as a charity or CASC has been covered in other featured pieces published by LawInSport so I will only briefly mention them here.18 Clubs have a choice of registering under either (not both) or not registering at all. A high level comparison of the three options facing clubs can be found on a dedicated CASC website, www.cascinfo.co.uk.19
PAYE, NIC and NMW will apply in the same way to all three but charity status does attract VAT reliefs not available to the other two including the zero rating relief on new buildings mentioned above.
It is in the CT area that clubs really benefit since under both charity and CASC status CT can effectively be avoided. This is because firstly, there are exemptions for certain types of income and all capital gains provided they are used for sporting purposes within the CASC and charity respectively and secondly, where these exemptions are not available taxable activities can be carried on by a trading subsidiary. Although this makes taxable profits they can be donated tax free to the subsidiary's CASC/ charity parent. Such a structure has been available to charities for many years and is now available to CASC's.
Other major benefits to charity and CASC status are 80% mandatory business rate relief and the ability to use gift aid and the gift aid small donations scheme to recover 25% back from HMRC on any donations received.
Registration for either status, and complying with ongoing administrative and regulatory requirements, will require extra work and impose conditions so registration is not for every club. The benefits should be weighed up against the costs for each club to see whether registration is worthwhile.
Sports clubs are often unaware of their tax obligations. Responsibility for tax usually falls to the treasurer who, as a volunteer, will not generally (in the author’s experience) have the skills to deal with all of its many aspects. Treasurers will have very different backgrounds and the club treasurer will often change without passing on the club's tax history or knowledge. A lawyer taking on the role should take particular care since HMRC is likely to have less sympathy with a professional who gets it wrong. If the club is not incorporated the treasurer can be exposed to liability for any tax debts that are due.20 Considering incorporation may therefore be worthwhile.21
Unfortunately community sports clubs run by volunteers generally enjoy no special tax treatment; in the author’s view HMRC and HM Treasury do not recognise the good work that clubs do in the community, although in recent years matters have improved with the ability of some clubs to register as charities or under the Community Amateur Sports Club (CASC) scheme.22 Despite this, less than 10% have taken advantage of either tax-favoured status.
There is no point in clubs burying their heads in the sand when it comes to tax. HMRC regard sports clubs as a happy hunting ground for training new compliance officers where they are guaranteed to collect tax from clubs that do not comply with their tax obligations. In the author’s experience, volunteers are likely to get things wrong in a tax system that is already sinking under the weight of a tax code of over 17,000 pages and which grows significantly following each annual Budget Statement.23
The treasurers task is not helped by an inconsistent non joined up approach to sport from HMRC across the UK; value added tax is a good example where individual Inspectors can often give quite different answers to the treatment of VAT recovery on facility improvement projects despite similar facts and circumstances. Asking another club about its experiences with the VAT-man will not necessarily be of much help. Sometimes HMRC's internal communication will work although not necessarily to a club's advantage e.g. a club whose HMRC PAYE audit revealed cash payments to players out of undeclared cash receipts from the bar may soon find it is subject to a VAT control visit and a request for under declared VAT, interest and penalties.
HMRC are putting clubs tax affairs under the microscope; they have tax to collect and will think nothing of going after a volunteer led community sports club.
Club treasurers should be prepared to defend their club's tax position (and themselves) taking advantage of any available HMRC concessions and reliefs where possible. A head in the sand attitude is fraught with danger!
- Community Amateur Sports Club Coprorate Law Corporation Tax Corporation Tax Act 2010 Employment Law Finance Act 2015 HM Revenue & Customs (HMRC) Income Tax (PAYE) National Insurance Contributions (NICs) National Minimum Wage Act 1998 Tax Law Taxes Management Act 1970 United Kingdom (UK) Value Added Tax (VAT) Value Added Tax Act 1994