Irrecoverable VAT charges on social welfare, fundraising, joint ventures and the maintenance of buildings are the four principal targets for reform in the new campaign by the Charities Tax Reform Group.
It wants the Government to take action to create "a level playing field" where charities will not be more heavily burdened by VAT than public or private sector organisations with which they compete for contracts or work in partnership.
The CTRG says that when the VAT system was developed, the special position of charities was never considered. "Because they provide services that are either exempt from VAT or outside the scope of the VAT system, they are unable to get back the VAT that they pay on purchases to support their charitable aims," says the CTRG. "They are, in effect, treated as the final consumer, even when they are not."
Charity VAT calculations are also complicated because their mixture of services attract a wide range of tax treatment.
Local authorities receive automatic refund of VAT they pay when providing services that are often identical to those from charities, and the main demand of the campaign is that charities should also get this so-called section 33 relief.
"It is counter-productive to take resources from charities performing a public service," says the CTRG.
The second demand is to remove VAT on fundraising supplies such as paper or design services. The CTRG says the Government encourages giving, but charities working the hardest to raise funds are penalised most - Oxfam, for example, spent £18.9m on fundraising last year and lost £1.3m in VAT.
VAT on shared services could be removed under EU law, the CTRG says: "This is an example where there is not a level playing field with the public and commercial sectors where sharing services is a common method of reducing support costs." Charities should also be spared VAT on repairing buildings such as care homes, it argues.
- See Editorial, page 22
THE BOTTOM LINE
£500m - The amount of irrecoverable VAT estimated to be paid by charities each year - money that the sector says could be spent on extra services
£586m - The benefit charities receive annually from Gift Aid - which campaigners point out is almost entirely clawed back by the Treasury in VAT
10% - The proportion of total expenditure that goes on VAT payments in the hardest-hit charities: the average figure is 4 per cent
1.5% - The proportion of total expenditure that goes on VAT payments in the private sector
Source: Charities Tax Reform Group
CASE STUDY - SUE RYDER
Sue Ryder Care is a leading provider of specialist palliative care, neurological care and homecare in England and Scotland, working in close partnership with primary care trusts and social services departments.
It has paid £2.5m in irrecoverable VAT in the past five years.
Chief executive Iain Henderson said Sue Ryder Care specialises in areas where statutory services have neither the skills nor capacity to operate.
"We feel strongly that in the interests of the health and well-being of the nation, we should be able to reclaim this money for use in providing more care for those people who need our expertise," he added.
"The kinds of thing we cannot recover VAT on are the core infrastructure services that are essential and underpin our ability to deliver care.
These include things such as heat, light, water, IT, telephones, stationery, running and maintaining patient transport, and building maintenance services at care centres."
Last year the charity had 3,000 referrals to its palliative care services and 7,500 people attended its day hospices. It cared for 400 people in its neurological care centres and provided 250,000 hours of care for people in their own homes.
All this involved total expenditure of £55m, and its irrecoverable VAT bill for the year was £550,000.
The charity says that if it could recover that sum, it would be able to provide specialised round-the-clock care for around 10 people with severe long-term neurological conditions for a whole year, and supply five additional beds with round-the-clock associated care services in one of its specialist palliative care units.
The charity was founded by Lady Ryder of Warsaw, who died in 2000.
CASE STUDY - HOME FARM
Home Farm Trust provides services for more than 900 people in supported living, registered care homes, advocacy, supported employment and day services.
It also provides a support service for thousands of carers of people with a learning disability. The charity employs 1,400 people, and its income in 2004/05 was £32m.
As a not-for-profit provider of care services, its services are exempt from output VAT, which means it is able to claim back hardly any of the input VAT incurred on the day-to-day running costs of the charity and capital developments.
"This lost VAT amounts to a £700,000 a year cash cost," said Peter Needham, the trust's finance director. "This is money which could be reinvested in our service if we were able to recover it."
He said the extra money could be used to provide facilities for between 10 and 20 beneficiaries. Alternatively, it could pay for 35 extra support staff.
Another choice would be to improve the pay and benefits of the existing workforce by 3 per cent, said Needham. "This would be a very significant step in a relatively low paid employment sector and would help to reduce other costs such as agency and recruitment.
"It could also fund research projects into future patterns of care, to ensure we continue to provide the best quality of support to our service users."