Parish and Town Councils

Tax issues

Until recently VAT and employment taxes caused very few problems for Parish and Town Councils. However, financial pressures on Council Tax and Precepts have caused most Councils to consider carefully their current and future budgets.

Value Added Tax

VAT law relating to the Councils is clear but unfortunately HM Revenue and Customs (HMRC) interpretation of that law can cause problems and frequently Councils only belatedly find out that VAT on particular projects is not recoverable. This can have disastrous results to the budgets for the period in question. Most problems occur when a Council decides to construct new buildings or refurbish existing facilities.

Our experience in dealing with local authorities enables us to identify cost effective solutions to these VAT issues but as ever it is preferable that the matters are considered in advance rather than after being presented with a large VAT bill.

Many Parish and Town Councils reclaim their VAT via a VAT 126 claim form. This works well until there is exempt input tax or taxable input tax to deal with. HMRC are likely to start asking awkward questions if this should happen and it very often does when the Council starts to rent out rooms and buildings following building works. HMRC are not always able to be helpful and can often confuse the issue somewhat.

We have helped 14 Councils recently with projects involving sport and leisure, village halls, Town Halls, Memorial Halls, Community and Charity projects and third party purchasing and the common denominator in most of these is land and buildings and the VAT law surrounding this issue. Partial exemption is not quite so straight forward as it is for the larger Borough and District Councils so it can cause major problems.

We are happy to help wherever possible and normally we are happy to agree to an initial meeting on a free of charge basis in order to scope the issues prior to agreeing a mutually agreeable fee arrangement.

Employment status and PAYE

Town and Parish Councils often employ local people who are happy to work on an informal, voluntary or low paid basis simply because they want to make a contribution to their community.

Unfortunately the tax-man still expects Councils to comply with the PAYE Regulations in these cases. Typical examples that we have seen are where a pensioner operated a car-park in return for a small percentage of the takings and a voluntary clerk who was paid a nominal honorarium for taking minutes at meetings.

In both cases HMRC treated the Parish Councils as employers and held them responsible for deducting PAYE, even where the workers claimed to be volunteers or self-employed. The fact that a person may have offered their services at a fraction of the market rate in order to be of service to their local community is irrelevant; they are in receipt of taxable earnings and the payer must file all the statutory PAYE returns or face strict penalties.

One possible solution is to reward such people with payments in kind instead of cash. If an individual’s annual rate of pay from an employment (ie cash pay plus the cost of any benefits in kind) is less than £8,500 pa the non-cash benefits are only taxed on their second hand value. In many cases (eg a Christmas turkey) HMRC will accept that this is nil as it would be difficult for an employee to sell-on such an item for its retail value!

Town and Parish Councils that are paying casual helpers ‘cash in hand’ should consider their other legal obligations too, such as the National Minimum Wage and Working Time Regulations. They will also have to carry adequate insurance in case a person is injured whilst carrying out their work.

In the past, HMRC have issued guidance on the tax treatment of payments made by Parish Councils to their Clerks and Responsible Financial Officers indicating that these payments could be made outside of a PAYE scheme. This guidance was based on the premise that payments to Clerks fell below the PAYE tax threshold. HMRC is now aware that many Clerks earn in excess of the PAYE and National Insurance contributions thresholds. HMRC has therefore decided to issue new guidance on the tax treatment of Parish Clerks.

We are happy to help wherever possible and very often we are happy to agree to an initial meeting on a free of charge basis in order to scope the issues prior to agreeing a mutually agreeable fee arrangement.

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