New year, new VAT problem. Many charities receive grants from local or national government, and many local authorities even give payment for service provision in the form of grants because it saves them from the elaborate procurement and tendering processes required by EU law. But more authorities are now moving towards service level agreements with charities, and concern is growing that this will shift charities into a different tax regime, which will leave them with a larger burden of irrecoverable VAT.
The instinctive reaction to this might be to shun service level agreements and stick with the devil you know. But service level agreements potentially offer the better deal in the longer term, not least because they will make it easier to include payment of irrecoverable VAT as part of the contract, under the principle of full cost recovery to which everyone now subscribes.
The word 'potentially' is necessary here because the advantages depend on a satisfactory solution to a number of VAT anomalies which, if left unaddressed, will indeed make service level agreements more onerous. These anomalies have been raised by the sector with the Treasury and HM Revenue & Customs, and officials have acknowledged that the present position is not tenable.
So the sooner these outstanding VAT issues are sorted out and the more service level agreements are signed, the sooner charities will be able to use the full cost recovery principle to minimise their VAT burden - which is, after all, the route the Government says it wants everyone to take.
When charity disputes get out of control
When things go pear-shaped in charities, they can go quite unpleasantly pear-shaped. A case in point is the National Obesity Forum, where a policy dispute turned into an exchange of personal accusations, threats of injunctions and stories in Third Sector and The Observer. Fortunately, the protagonists seem to be burying the hatchet. Why do such bust-ups happen? The answer might have something to do with the aspects of charities that are usually their greatest strengths - people's intense feelings about their cause, and a system of governance that precludes the use of a ruthless 'command' style of management, which would often be used to solve such difficulties in the private sector.