The government's move on VAT for charities, set out in documents released alongside today’s autumn statement, is, in effect, a decision to implement a long-standing European rule that exempts charities from VAT when they share services.
Charities that want to share back-office services such as HR and IT currently have to pay what the Charity Tax Group described as an "artificial VAT charge".
The charge does not apply to most businesses that share services, although it does apply to providers of exempt services, including financial services, health and education.
Documents released today indicate the relief will come into force in April and the government predicts the cost to the Exchequer will be £25m in 2012/13, although the sector uptake will only be a portion of that. The cost of the scheme is expected to rise by £25m a year and reach £125m in 2016/17.
Peter Jenkins, an adviser on VAT to the CTG, said the value of the exemption to the sector could be up to £30m a year, but its potential value would vary considerably, depending on how it was implemented.
During a consultation on the exemption, which closed at the end of September, charities objected to several limitations on the scope of the exemption. The autumn statement does not make it clear how the government proposes to respond to these.
One objection was to a rule requiring them to form a separate group to supply services, with no one charity in overall control, rather than allowing one charity to provide services to another.
A joint statement at the time from the National Council for Voluntary Organisations, the Charity Finance Directors’ Group, Universities UK and the National Housing Federation said the rules were "of little use" to charities, as laid out in the consultation.
However, the CFDG said today that after a meeting with the Treasury in the run-up to today's statement it expected the government would relax the "overall control" rule, meaning one charity could set up a separate group under its control, and then allow other charities to join.
Melora Jezierska, policy officer at the CFDG, said this was likely to make it much easier for charities to use cost-sharing groups.
"It would be extremely difficult, time-consuming and expensive for a number of small charities to come together and set up a group to provide shared services," she said. "This way, one charity can transfer its staff into a group that it controls, and others could procure services from it."
Sector experts, including the Chartered Institute of Taxation, have also objected to HM Revenue & Customs’ interpretation of the rule, which says that back-office services such as payroll and HR are not considered "directly necessary" and will not fall within the scope of the exemption.
HMRC has proposed an exception from this rule for charities that provide only services that are exempt from VAT, or which only provide a small proportion of services liable to VAT.
It has not specified which services would be considered directly necessary, and how much of a charity’s activities must not be liable for VAT before it cannot use the exemption.
Peter Kyle, deputy chief executive of chief executives body Acevo, said:"This VAT announcement is significant for the sector, but we need to figure out if it's a bureaucratic nightmare. If it is, the sector will just ignore it. If it's focused on the needs of service deliverers rather than those of the Treasury, it may work."