The definition of “enterprise” in section 1 of the VAT Act includes the activities of the “welfare organization”. The VAT Act defines the term “welfare organization” to mean any public benefit organization contemplated in paragraph (a) of the definition of “public benefit organization” in section 30(1) of the Income Tax Act on any welfare activity determined by the Minister for purposes of the VAT Act.
The inclusion of welfare activities in the definition of “enterprise” effectively means that entities who qualify as welfare organizations may register for VAT purposes, notwithstanding that these entities may not be making any taxable supplies, subject to VAT at the standard rate of 15% or zero rate. This inclusion was principally aimed at recognizing the role played by welfare organizations in advancing public good initiatives, and the opportunity to register for VAT purposes ensures that they are entitled to recover the input tax on the goods or services acquired for their enterprise activities.
Welfare organization generally receive funding from a variety of sources which may include, amongst others, public authorities as well as the private sector. With regards to the funding received from the private sector, an assessment ought to be performed to establish whether the funding received would meet the definition a “donation” as defined for VAT purposes. In the event where the funding received meets the definition of a “donation” as defined for VAT purposes, it means that such funding would not constitute a consideration and therefore no VAT would be applicable. Equally, where the funding received does not meet the definition of a “donation” as defined, the funding could potentially be subject to VAT at the standard rate of 15%.
For funding to constitute a donation as defined for VAT purposes, the VAT Act requires that no direct identifiable benefit accrues in the hands of the donor in the form of goods or services. Effectively this means that should any reciprocation that may be construed to constitute a benefit accrue to the donor, such funding would be regarded as a consideration for the goods or services supplied.
Often the contracts governing the funding received contains clauses which suggest that the recipient, i.e. welfare organization is required to perform some marketing or promotional services, which in certain instances are practically not performed. However, for VAT purposes, the contract could suggest that the payment does not qualify as a donation as a result of certain obligations (e.g. marketing and promotional services) imposed to the recipient of the funding with the result that the payment could be subject to VAT at the standard rate of 15%. It is therefore important that the parties consider the impact of certain clauses, which are likely to impact the VAT treatment of the funding received.
Further, where such funding is subject to VAT at the standard rate of 15%, it is often the welfare organization that has to fund the 15% VAT from its pocket as most of the contracts would provide that where VAT is applicable, it would be the responsibility of the recipient of the donation. Consequently, the full funding received would be deemed to be inclusive of VAT.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
