The Charity Finance Group has called for a joint government and charity sector working party to decide how the VAT system should operate after Brexit.
In a submission to the Chancellor of the Exchequer, Philip Hammond, before the autumn Budget, which will take place on 22 November, the CFG says there are some "significant opportunities" for charities from Brexit, in particular in charity tax, and that the government should "lay the foundation for a stronger charity sector".
Irrevocable VAT costs the charity sector approximately £1.5bn a year, which is equivalent to £9,204 for every charity in the UK, the submission says.
The European Union currently sets rules on VAT zero rates, but the CFG’s letter says that on departing the EU the government could help charities by phasing in a rebate scheme to allow VAT incurred on non-business income to be reclaimed over five years.
This could be supplemented, it says, by converting existing VAT exemptions into zero ratings or "options to tax", which would allow charities to recover VAT.
These two proposals could save the charity sector 90 per cent of its current VAT tax burden, the submission says.
"The impact of VAT reform would be transformational to the UK charity sector, not only reducing the amount of time spent focused on structuring activities in such a way as to avoid large VAT bills and paying for advice, but also in freeing up hundreds of millions of pounds to be spent on helping advance good causes," it says.
The CFG is also calling for charities to be exempt from paying insurance premium tax – a tax on general insurance premiums – and for business rate relief for charities to be increased, including a target to create 100 per cent rate relief by the end of this decade.
The CFG’s letter come after a submission last week from the National Council for Voluntary Organisations, the charity chief executives body Acevo and UK Community Foundations that called on the government to create a successor to the European Social Fund.
The ESF provides European investment for social issues, such as improving skills and training and reducing inactivity among young people and the long-term unemployed. Charities receive approximately £300m a year from the ESF.
The joint submission said that the government had an opportunity to keep the best aspects of the ESF while reducing the scheme’s bureaucracy.
The £1bn in dormant assets the government’s Commission on Dormant Assets recently uncovered should also be used to strengthen the charity sector, the joint submission said, including allowing communities to purchase local amenities and assets, such as village halls or pubs.
The Charity Tax Group also used its submission ahead of the Budget to call for an improved VAT system, reform of Gift Aid donor benefit rules, reducing tax burdens on the charity sector and making charities’ trading subsidiaries exempt from HM Revenue & Customs’ Making Tax Digital programme.