The single most important point to bear in mind is that locally trusted organisations will generally be unable to reclaim VAT charged by suppliers to them. As this is the case, locally trusted organisations need to ensure that their budgets include the VAT that will be charged to them.
This is unlikely to change even if the locally trusted organisation is a body which reclaims VAT on its other activities. It may well have VAT-able activities that allow it to reclaim VAT on those costs, but that does not give it the right to reclaim VAT on the costs of its locally trusted organisation activities. These have to be considered separately.
An exception to this would be if a local authority is a locally trusted organisation, since these bodies have the right to reclaim VAT on any non-business activity they carry out (which would probably cover its activities as locally trusted organisation). However, each local authority should be able to obtain a view from its own finance department.
Where a local authority school (such as a community school, foundation or trust school, voluntary-aided or voluntary-controlled school) is the locally trusted organisation, the position will be the same as where the local authority is the locally trusted organisation.
The position for an academy school or free school is different. These schools are allowed to reclaim VAT on costs relating to the education they provide. So if a payment they make as locally trusted organisation relates to the education they provide, then it may qualify for a claim. However, the rule specifically states that the 'proprietor of an academy' must act in that capacity to fall within the rules, and this may not always be the case for payments the school makes as a locally trusted organisation related to Big Local. That said, HMRC's Information Sheet 09/11 suggests otherwise, and says that an academy can reclaim VAT on costs of any other non-business activity it undertakes. Academies will need to consider whether as locally trusted organisation they are performing activities relating to the education they provide or if the academy is carrying out an activity which is not related to this. This point of interpretation is best clarified in writing by the academy directly with HMRC.
Other schools (not those described above) such as independent schools - would not be able to reclaim VAT if they are a locally trusted organisation.
However, all of this assumes that the locally trusted organisation is not performing a business activity. Guidance on whether that is the case is provided below - Grants from Local Trust to locally trusted organisations. If the locally trusted organisation activity involves business supplies which are taxable for VAT purposes, this will allow a proportion of VAT to be reclaimed on costs if the locally trusted organisation is registered to reclaim VAT.
Not all costs incurred by a locally trusted organisation will automatically carry a VAT charge. Guidance on where this might arise is outlined below in Payments to third parties.
Payments to third parties
The fact that the payment from Local Trust to the locally trusted organisation is a grant for VAT purposes does not necessarily affect the treatment of payments the locally trusted organisation makes to third parties. Although HMRC has not published a particular policy concerning third party payments, it is understood from experience that, where third party organisations have been identified by the Big Local partnership as suitable to receive funding through the locally trusted organisation, and Local Trust is informed (which is usually the case), then any money from the locally trusted organisation to each of those third parties would normally be regarded as a grant. Grants do not involve a charge of VAT.
This is a general principle, and locally trusted organisations need to look at their position in detail.
For the most part, third party recipients will not provide services formally, as part of their own business activity, since they are not supposed to get any financial advantage out of receiving a grant from Local Trust. However, there may be situations where bodies such as local social groups, residents’ associations, and church groups are providers, and they may decide that they are supplying services for which they have to charge VAT. The key determining factor is likely to be that, the more specific the service provided and the greater the clarity with which it is guaranteed to the locally trusted organisation, the higher the risks that the services will be subject to VAT rather than be a grant funded activity. To justify this view HMRC would have to consider that an organisation or group of this kind was acting in a business-like manner, with a degree of scale, regularity, and business organisation, which will be typical of a normal business.
It will not be possible to avoid VAT being chargeable by local contractors that a locally trusted organisation hires to perform services in the course of their ordinary business. For example, a decorating company hired to decorate a community hall, cannot treat the payment as a grant simply because it is derived from a grant from Local Trust. For them, the activity will be a service in line with their normal activities and will be subject to VAT.
Certain services may be exempt from VAT under specific provisions which will need to be determined on a case by case basis. An example might be education services provided by a non-profit body.
If a locally trusted organisation uses employment contracts to take on workers, there will be no VAT to pay (in contrast to using self-employed people or contract workers), but the employment responsibilities, such as employee rights, need to be considered alongside this advantage. Using certain small traders may allow a locally trusted organisation to receive services without VAT if those traders trade legitimately below the VAT threshold. However, entering into cash jobs or similar structures where tax and VAT are being suppressed is an act of fraud.