A group of major charity umbrella bodies have called for major reform to the VAT system because of the “significant burden” it places on UK voluntary sector organisations.
In a written submission to the House of Commons Treasury Committee for its inquiry into "tax after coronavirus", the four umbrella bodies say that charities are unable to recover the VAT they pay on purchases to help their beneficiaries because they provide services that are outside the scope of the VAT system.
“They are, in effect, treated as the final consumer, even when they are not,” says the submission, from the National Council for Voluntary Organisations, the Charity Finance Group, the Charity Tax Group and the Chartered Institute of Fundraising.
It says forthcoming research from the CTG will provide strong evidence that VAT continues to place a significant burden on UK charities, despite existing reliefs.
“A fundamental review of VAT should be at the forefront of the government’s policy agenda for the charity sector,” it says.
The submission says tax reliefs were worth at least £3.2bn to the sector in 2018/19, which it says is “a small investment compared with the socio-economic benefits that charities provide”, such as generating employment, investing in research and reducing reliance on state services.
It says successive governments have been dragging their heels in addressing the “significant costs and complexities” for charities in complying with tax legislation designed to prevent organisations being used as vehicles for fraud and tax avoidance.
“This is a cause for concern since it suggests that some charities are having to devote a disproportionately high level of their resources to compliance: resources which might be better devoted directly to their charitable activities.”
The submission also calls for a government review of the scope and value of taxes paid by charities.
It says the sector paid at least £2bn in business rates and irrecoverable VAT last year, “significantly more than is commonly perceived to be the case”.
It says: “The reality is that if many of the existing tax reliefs were not in place the cost to the sector and the wider community and economy would be higher as charities would have fewer resources to deliver their vital work, placing additional burden on public services.”