British not-for-profit organisation hit by international tax scandal

This could easily be the unwelcome headline that a British not-for-profit (NFP) organisation wakes up to in the near future. Below we describe four common traps that you should navigate to ensure that it’s not you.

In the current climate, tax headlines like this could hit the NFP sector in a damaging way. But wait a moment; NFPs and international tax avoidance – surely these organisations have been at the forefront of challenging such behaviour, not participating in it? And anyway, NFPs are not liable to tax, are they?

If only life were so simple. We’re not suggesting that NFPs are deliberately setting out to enter into tax avoidance, but there are many traps for the unwary. Also, whilst NFPs benefit from certain exemptions from UK tax, the same is not always true overseas.

Failing to pay attention to the tax affairs of your organisation could lead to some very uncomfortable publicity even if you’ve simply overlooked an issue, made an error or received poor advice. Many tax experts struggle to differentiate between the nuances of carelessness and negligence, tax planning and tax avoidance. Headline writers are unlikely to dwell on technicalities and tend to default to a description that will grab the attention of readers. Your accidental tax oversight may end up as front page news.

We’re finding that many NFP organisations are seeking assurance to gain certainty on what is often a complex and previously a low priority issue. This is particularly important now as tax authorities in many developing countries are modernising their tax rules and taking tax compliance seriously.

Some common traps to consider:

1. You provide educational or development services overseas and get paid for doing so
Are you paying local corporate, income and indirect taxes? Should you be?

2. You receive fees or payments for the use of your intellectual property or services that you provide
Are you sure that you are receiving the correct amount of fees? Are you paying withholding taxes? Should you be?

3. You have employees or representatives marketing or selling overseas
Are you aware that they may be creating a local tax liability for the organisation? Have their personal tax liabilities been considered?

4. You have transactions between parts of the organisation in different countries?
Do these need to be  priced in accordance with new transfer pricing rules? Can you demonstrate that they have been?

We’re working with a number of NFPs to help them ensure they don’t fall victim to the common traps. Tax may not be a priority for your organisation, but reputational risk probably is. Don’t make the headlines for the wrong reasons!
 
For further information or to discuss how we can support you with assurance over your tax affairs, contact our tax expert, Ken Almand.

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