At a time when major sources of income disappear almost overnight and charities are furloughing up to 80 per cent of their staff, it is a small relief to realise that the crucial Coronavirus Job Retention Scheme (CJRS) will operate on a pay-now check-later basis. This is the same as Gift Aid so, while CJRS will provide grants, the need for an audit trail for possible HMRC audit will be very familiar to charities.
Charities also know that tax rules are normally not written with them in mind and are used to making do with a one-size-fits-all approach that does not address their specific circumstances. A case in point is the direct tax treatment of CJRS grants. HMRC guidance, last updated on 9 April, states that while these are not taxable in the hands of individuals claiming in respect of nannies and domestic staff, they must be included by businesses as taxable income.
This is remarkably like the approach a few years ago with feed-in-tariff payments for electricity generated by solar panels. As many charities know to their cost, this resulted in the income falling outside of their tax exemption.
So, what is the direct tax position?
CJRS grants are taxable income but can only be used to pay the (tax-deductible) wages of furloughed employees. As CJRS is a mechanism for government to keep the UK workforce in place by meeting most of the payroll cost so businesses can restart quickly once the current lockdown ends, this is entirely logical. However, unlike feed-in-tariff, which was a subsidy that exceeded costs, there should be no profit or loss from CJRS to tax.
But what about VAT? The terms of the CJRS grant simply ensure that it is only spent on meeting wage costs of furloughed staff and so is outside the scope of VAT and, itself, will not affect the VAT recovery rate for organisations. However, there is an impact which is wider than CJRS: many charities have virtually closed for the duration so their business/non-business calculations may have changed as a result of reduced business income. Without further consideration, this could affect the VAT they can recover, likely increasing their irrecoverable VAT costs at a time when every penny counts.
However, an interrupted business activity as a result of the impact of coronavirus, temporarily not generating income, remains a business activity. Therefore, charities should consider using an alternative business/non-business calculation which accurately and fairly reflects their business activities during the impact of coronavirus and prevents an unintended loss of recoverable VAT.