The article provides insights into the recent inclusion of welfare organizations in the definition of "enterprise" for Value Added Tax (VAT) purposes. This significant change allows welfare organizations to register for VAT, even if they do not engage in taxable supplies. The primary objective is to recognize and appreciate the valuable contribution of welfare organizations in promoting initiatives for the public good. By registering for VAT, these organizations can reclaim input tax on goods or services acquired for their activities.
Welfare organizations typically receive funding from diverse sources, including public authorities and the private sector. When it comes to funding from the private sector, it becomes crucial to evaluate if the funding qualifies as a "donation" for VAT purposes. When funding meets the criteria of a "donation," it is not subject to VAT since it is not considered as a consideration. However, if the funding fails to meet the definition of a "donation," it may be liable for VAT at the standard rate of 15%.
To be considered a donation for VAT purposes, the VAT Act stipulates that the donor must not receive any direct identifiable benefit in the form of goods or services. If any benefit that can be perceived as reciprocation is received by the donor, the funding would be considered as consideration for the goods or services provided.
Often the contracts governing the funding received contain 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 on 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 organisation 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. If you are a welfare organisation and require advice on the VAT treatment of funding received from various sources and VAT treatment of the expenses incurred which are directly attributable to donations received, please contact us.
