A proposed change in tax law intended to make it easier for organisations to share services is of little use to the charity sector, according to an alliance of national bodies.
An HM Revenue & Customs consultation closes today on implementing an EU exemption designed to allow charities and other businesses that cannot recover all their VAT to collaborate more effectively.
Most companies can charge one another for services without incurring a tax liability because they are able to recover VAT. However, charities usually cannot recover all their VAT and so must pay tax on any service they buy from another charity.
In a joint statement, the National Council for Voluntary Organisations, the Charity Finance Directors’ Group, Universities UK and the National Housing Federation said VAT acted as "a massive barrier to collaboration" among charities, but the proposed exemption did not address the problem.
"In its proposed form, the exemption is likely to be of little use to the charity sector, particularly for smaller organisations who in many cases could benefit the most from cost sharing," a joint statement from the organisations said.
The CFDG has said in its response to the consultation that the conditions in the exemption the government has proposed are too restrictive. In particular, HMRC has said that charities could not supply services directly to one another, but would have to set up a third party to do so. This is seen as extremely bureaucratic and likely to lead to extra risk and to HR and pension difficulties.
Sir Stuart Etherington, chief executive of the NCVO, said: "The government needs to look at the wider picture and seize this opportunity to address what is a long-standing issue for charities.
"Collaborative working not only delivers cost savings, but also helps charities to provide better services with service users’ needs in mind. We know that there is appetite within the sector to work together more effectively and efficiently, especially in these challenging economic times.
"It now rests on the government to ensure that collaborative working is a worthwhile and straightforward venture open to everyone."