Charities face a VAT 'timebomb' because local authorities are switching from grants to service level agreements, a sector expert has said.
Tom Fitch, chief executive of the sector training organisation Community Accountancy Self Help, predicted that some smaller charities would close when hit by tax bills that were far higher than expected.
'Service level agreements' are replacing grants as the preferred method for local councils to fund the voluntary sector because they stipulate what organisations must do with the money they receive.
But they have no legal status, and VAT offices and courts are likely to regard them as contracts. In many cases, this means that VAT should be paid on the funds charities receive.
"Many charities are not aware of this," said Fitch. "At some point it will all end in tears, with charities receiving massive bills for VAT.
The Government needs to look at the situation urgently."
But Helen Donoghue, director of the Charities' Tax Reform Group, said that if the VAT anomalies could be resolved, service level agreements could actually be good for the sector.
- See Editorial, page 22.