UK: Don't Get Stung By The Apprenticeship Levy

Last Updated: 20 April 2016
Article by Smith & Williamson


In this issue we have several tax-related articles detailing recent developments which may affect many of you. The apprenticeship levy comes in as from April 2017 and will be collected from all employers with a wage bill of over £3m, including charities, and irrespective of whether or not you have apprentices within your organisation.

Trading subsidiaries of charities have long used the gift aid method to remit profits to their parent charities in order to eliminate the tax liability in the subsidiary. Historically, there has been disagreement between HMRC and the Charity Commission over whether any donation in excess of reserves should be treated as a distribution and new guidance from HMRC has recently been issued to clarify this. Claire Perrett's article on page 4 provides more detail.

Our guest author, Jonathan Brinsden from law firm Bircham Dyson Bell, has written an interesting article on the lessons we can all learn from the collapse of Kids Company. Not surprisingly, he concludes that good governance is as important as ever and can protect trustees if things go wrong.

Following on from this, we have an article summarising the Charity Commission's 'The essential trustee' guidance, which was reissued last year. Trustees' responsibilities can be onerous, but burying your head in the sand does not make them go away. I would advise all new trustees to read this as part of their induction process. Longstanding trustees who feel they need a reminder of their duties could also benefit from the publication. If you feel that your charity needs a governance review, this is something that your usual Smith & Williamson contact will be able to assist with.

Also worth noting here is the outcome of the recent SORP consultation that was published in February. The SORP committee has updated the wording of the FRS 102 SORP to remove references to the FRSSE SORP, which was withdrawn as of 1 January 2016, when the FRSSE was also withdrawn. The committee has also updated the definition of 'larger charities' in the SORP to define these as charities with income exceeding £500,000 (or €500,000 in the Republic of Ireland). This means that charities below the Charities Act audit threshold of £1m will be required to make additional reporting disclosures that were previously only mandatory for audited charities.

Interestingly, the revised SORP doesn't preclude charities from using the new disclosure exemptions for small entities (section 1A of FRS 102). However, you should be aware that many disclosures that are not required by section 1A are actually picked up by the SORP anyway, negating the impact of the exemptions. One useful exemption that remains is the requirement to prepare a statement of cash flows, which puts small charities in a similar position as under 'old' UK GAAP.

Adrian Wild

Assurance and business servicest

Plan your training so that you don't end up with the levy and a wasted allowance.

Over 1,000 UK charities are expected to be affected by the new apprenticeship levy, announced in the Autumn Statement 2015. Draft legislation to introduce this new levy was released on 4 February 2016.

The charity sector had hoped for an exemption from the levy, as arguably charities are less likely to operate apprenticeship schemes than other employers. Fund raising focuses on delivering the primary charitable purpose, not training for employees. Unfortunately there is no exemption, so the larger charity employers in particular are likely to see an additional strain on their funding.

How does it work?

The levy will be introduced from April 2017. Employers with a wage bill of more than £3m will have to pay the levy of 0.5% on it (from £15,000), through the PAYE system (with their monthly PAYE tax and National Insurance Contribution liabilities). The levy will form part of the real time information payroll reporting. Each employer will receive an allowance of up to £15,000 to offset against their levy payment and to use to train their apprentices. However, if your wage bill exceeds £3m, then the levy will become a cost to you, as it starts at £15,000.

None of the cost of the levy can be borne by the employee. If the charity is subject to the levy you cannot reduce the employee's salary to compensate for this, even if the allowance received by the charity is used to fund apprentice training for the individual.

There will be a connected persons rule, similar to the employment allowance connected persons rule, so charities who operate multiple payrolls through connected persons will only be able to claim one allowance. The connected persons rule will apply to charities and charitable trusts will be treated as companies in assessing whether charities are connected.

The levy is expected to raise £2.7bn in 2017/18 rising to over £3bn in 2020/21. The Government will use the money raised to fund apprenticeships.

Making the new apprenticeship levy work for you

The new apprenticeship levy could assist with training apprentices. However, as an employer can only benefit from the levy if they train an apprentice, it is the large employers that will suffer most as they will, in effect, be helping to fund the training of those employers drawing on the levy fund in excess of their contributions into the fund.

It doesn't matter if you are a large or a small charity entitled to claim the allowance or paying a levy, it will be important to make the levy work for you, rather than end up as an additional payroll cost. You need to consider your organisation's strategy for apprenticeships. Review your talent strategy as a whole (graduates, apprentices and internal talent and development schemes) across all divisions and functions, with a view to designing new propositions that are interconnected and enable you to make the most of your allowance.

Full details of how the allowance can be used are not yet available, but it's expected that top ups will be available to employers who draw on their contribution account to fund approved apprentice training within a two-year period. After that initial period, any unused funds will be used to fund the training needs of other employers. For charities employing apprentices it will be important to optimise the use of apprenticeship levy funds.

Fiona Ferguson

Busniness Tax

Tax relief on donations

Are you playing by the rules?

When might a donation from your trading company to its parent charity not be tax allowable?

For charities, the normal process for trading that does not meet the charitable objectives is to operate the taxable trade through a trading subsidiary. The subsidiary can therefore gift aid its profits to the charity and claim tax relief on the donation, as long as the charity uses the donated funds for its charitable purposes.

The key conditions that must be met to ensure the payment is a valid gift aid payment are that:

  • the donation is an actual payment
  • if the trading company is a subsidiary of the charity, then the payment can be made within nine months of the year end
  • the trading company has the reserves to support the gift aid payment.

In October 2014, the Institute of Chartered Accountancy in England and Wales (ICAEW) issued guidance on the importance of having reserves in the trading company to cover the level of donation. Historically, the Charity Commission had confirmed that the donation in excess of the reserves was not a distribution. However HMRC has never accepted this position and the ICAEW issued guidance, having obtained counsel's opinion that any distribution in excess of the company's reserves is an unlawful distribution, which creates an amount subject to corporation tax.

Further to discussions between the ICAEW and HMRC, HMRC issued revised guidance in February 2016, stating that it would expect the guidance in its technical release to be followed by all charities and their subsidiaries for subsidiary accounting periods commencing on or after 1 April 2015.

If you have made donations in excess of your accounting profits to cover your taxable profits in the last six years, HMRC will expect the charitable parent company to repay the excess. The repayment of the excess is not a taxable receipt. It's important that excess donations do not continue as the directors of the company may become personally liable.

Gift aid donor benefit rules — have your say

HMRC has been obtaining evidence on simplifying the gift aid donor benefit rules. It has gathered evidence on what's working well and understanding the barriers faced by charities under the scheme, with aim of making improvements if appropriate. The biggest change is likely to be around the monetary thresholds. The consultation period is open until May 2016, so please ensure you have your say!

Please contact us if you need any advice on your situation.

Claire Perrett

Business tax

Post Kids Company — what are the lessons for trustees?

The drawbacks of single source funding

Jonathan Brinsden, a partner in the charities and social enterprise team at Bircham Dyson Bell law firm, reflects on the collapse of Kids Company.

The Public Administration and Constitutional Affairs Committee (PACAC) reported recently on the collapse of Kids Company. It follows the closure of the charity last summer only days after payment, against official advice, of a multi-million pound government grant intended to put the charity on a stable footing.

Kids Company was not a typical charity, but the PACAC report illustrates some risks which apply to other charities in today's straitened climate for example an over-reliance on single source funding. In Kids Company's case, the main funder was the Government. The short-term advantages of Government funding should be balanced against the risk of political controversy and lack of sustainability — a change in policy can mean a change in funding. Charities can also worry about accusations of being too close to the Government or that their independence may be compromised — if they speak out, will the funding stop? More generally, charity trustees should have a reserves policy and a plan of action in the event of a severe cut in funding, and try to mitigate their exposure by seeking out alternative funding sources. Of course, that is the ideal — but alternative funding and maintenance of a healthy reserve is not always possible. Increasingly, charities are finding it harder to square the circle of increased demands and diminished funding.

The role of Government in the charity sector

So why should the Government be funding charities at all? Aren't taxes paid for central projects, not individual charity operations? The Government is the custodian of taxpayers' money and responsible for its proper application, whether that is through centralised resources, outsourcing via procurement or through grants; the question is whether the Government is getting value for money on behalf of the taxpayer.

The PACAC report is clear that there are questions to answer from the Kids Company case, where normal grant-making and monitoring procedures were not followed. The apparent special treatment in this case would be alien to most grant-funded charities, which are used to providing solid evidence on impact and outcomes. The PACAC report followed hot on the heels of its report the previous week on the 2015 fundraising controversy, in which PACAC was notably critical of the trustees of some large charities, calling them "negligent, or wilfully blind" for failing to know about some of the bad practices being conducted by external fundraising agencies for the charities. Such a conclusion is easy to draw, but seemingly creates an expectation that volunteer trustees should be omniscient and omnipresent.

What can be drawn from both PACAC reports is that a greater emphasis on governance could have helped Kids Company and the fundraising charities to manage their risks, but governance is not easy, especially when it has to be done on top of the day job. Charities are often criticised for expenditure on administration, but time and resources spent by a charity on proper, good governance is never a wasted expense, rather a necessary investment in the charity's future.

Jonathan Brinsden

Bircham Dyson Bellt

The essential trustee

Doing your duty

Charity regulator launches new guidance on trustees' responsibilities.

In July 2015 the Charity Commission published the new version of its guidance 'The essential trustee', which can be found by searching The guidance explains the key duties of all trustees of charities in England and Wales, and what they need to do in order to carry out these duties competently. Speaking at a public meeting, William Shawcross, chairman of the Commission said: 'Trustees are the backbone of charities; without their tireless efforts many organisations would not achieve all that they do. We want trustees to feel confident in knowing what their duties are and empowered to carry them out. I hope this new clear guidance will help them do just that.'

Valuable advice for trustees

According to 'The essential trustee', trustees have six main duties. The guidance looks at each duty in turn and explains the legal requirements that trustees must meet and goes on to provide guidance on best practice that trustees should comply with.

1 Ensure your charity is carrying out its purposes for the public benefit.

The guidance recommends some good practices for trustees to undertake to ensure that everything the charity does, helps to do (or is intended to help) achieves the objects of the charity. Good practice includes:

  • understanding the charity's objects and powers as set out in its governing document and keep it up to date
  • planning what your charity will do and understanding and being able to explain how it benefits the public.

2 Comply with your charity's governing document and the law.

To ensure compliance with the legal or regulatory requirements, the guidance suggests every trustee should have an up to date copy of the governing document (such as the memorandum and articles of association).

Your charity may be subject to a wide range of laws and regulations, therefore while you are not expected to be a legal expert, reasonable steps should be taken to keep up to date with matters. The Charity Commission can provide email updates on new guidance and even has a Twitter account: @ChtyCommission.

3 Act in your charity's best interests.

Trustees must make decisions that enable the charity to best carry out its aims. The board should consider the long term as well as the short term. Trustees are also required to avoid conflicts of interest, which includes trustees and their related parties not receiving any benefit unless it is in the charity's best interest that they do so.

4 Manage your charity's resources responsibly.

The guidance states that trustees must act responsibly, reasonably and honestly, and exercise sound judgement. Examples of this are:

  • not over committing the charity by appropriately budgeting
  • avoiding exposing assets to undue risk with a risk management process
  • taking special care when investing or borrowing.

5 Act with reasonable care and skill.

Sometimes known as the duty of care, as a trustee you are responsible for governing the charity and it is expected you will prepare for, attend and participate in all trustee meetings. It also highlights that trustees should seek external advice when required and provides guidance on what to do if something goes wrong.

6 Ensure your charity is accountable.

Trustees need to be in compliance with statutory accounting and reporting requirements and should be able to demonstrate that the charity is complying with the law.

You may find it useful to undertake a governance review of internal policies and procedures. We can assist in the review and provide recommendations on how to ensure you are meeting your responsibilities

Nicole Trebilcock

Assurance and business services

VAT update

Are restaurant and entertainment services VAT exempt when linked to education?

On 2 December 2015, the Court of Appeal decided to make reference to the Court of Justice of the European Union (CJEU) concerning the VAT issues in the case of HMRC v Brockenhurst College. The case concerns the VAT treatment of charges made by the college to members of the public for catering and concert admission, when those supplies are delivered by students as part of their further education course.

The issue of the appeal is whether supplies to third parties made in the course of education, such as catering by catering students in the course of their studies, are VAT exempt because they are closely related to the principal supply of exempt education.

Under VAT legislation, goods and services which are closely related to exempt education are also VAT exempt.

A supply of education is VAT exempt when it is provided by an eligible body. For VAT purposes an eligible body is principally one which:

  1. is a charity, professional body or company;
  2. cannot and does not distribute any profit it makes; and
  3. uses any profit that might arise solely for the continuation of those educational supplies.

The Court of Appeal decided to make the reference to the CJEU as they agreed with both parties that the appeal turned entirely on issues of community law that could not be described as acte clair i.e. clear and free from doubt.

While we await the decision from the CJEU, it is important to note HMRC's interim position as set out in Revenue & Customs Brief 39/14. HMRC remains of the view that this case was wrongly decided at the Upper Tribunal and that supplies such as those in the Brockenhurst case are outside the scope of the education exemption when they are made to third parties not in receipt of education. However, the Upper Tribunal's 2014 decision, which still stands, indicates that colleges and other eligible bodies, which qualify for the education exemption, may have overpaid VAT on such supplies.

If you are an educational provider and/or a charity that receives income from 'events' enabling students to practice their skills and showcase their talents you might be affected. If you would like to discuss your situation or need assistance filing a claim, please contact me.

David Gage

Business tax

We have taken great care to ensure the accuracy of this newsletter. However, the newsletter is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. © Smith & Williamson Holdings Limited 2016. Code: 16/285 exp: 30/09/2016

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