Are charity tax breaks under threat?

Recent changes in the law have landed charities with more tax to pay. Joe Lepper asks whether the principle that charities should pay no tax can survive

Belinda Pratten, senior policy officer, NCVO (left), and Susie Squire, Taxpayers' Alliance
Belinda Pratten, senior policy officer, NCVO (left), and Susie Squire, Taxpayers' Alliance

The idea that charities should not pay tax has long been enshrined in UK law. It's a principle spelt out in legislation such as the Income and Corporation Taxes Act of 1988, which clearly sets out exemptions for charities. But recent changes to tax law have prompted some in the sector to question whether this long-held principle is now under threat.

The withdrawal of the Staff Hire Concession in April is one example. This change means that employers are now liable for VAT on fees charged by agencies that provide them with temporary staff. This is particularly irksome for social care and health charities that employ large numbers of temporary workers.

The Planning Act 2008 has also caused concern. The original version of the act did not give charities any exemption from the Community Infrastructure Levy, a tax on land that has been given planning permission. After lobbying by charities in the House of Lords, the Government did partially back down and developments that are used for charitable purposes will now be exempt.

But voluntary sector umbrella body the NCVO fears some charities will still lose out, because the tax could still apply to developments that raise money for a charity rather than meet its charitable purpose directly. The failure of this year's Budget to address the long-standing bugbear of irrecoverable VAT for charities is another concern.

One senior charity tax campaigner, who asked not to be named, believes the Community Infrastructure Levy, Staff Hire Concession and lack of action on VAT are only the beginning of a concerted effort by government to abolish charity tax exemptions altogether. "The message is clear from officials we have spoken to in government: they do not think charities should be entitled to tax exemptions as a standard," says the campaigner. "These latest changes and the lack of will to reform VAT are further examples of this. The Government's attitude on this is a very real concern to us."

But many charity tax campaigners believe the Government's intentions are not so malign. "I think it's more cock-up than conspiracy," says Conservative peer Lord Hodgson of Astley Abbotts, who is involved in the campaign for full exemption from the Community Infrastructure Levy. Belinda Pratten, a senior policy officer at the NCVO, agrees. "It shows a lack of joined-up thinking in government," she says. "Policy changes are made and the effects on charities are not being considered."

The Office of the Third Sector refutes this. A spokesman says the OTS has been liaising closely with the Communities and Local Government department on the Community Infrastructure Levy.

Keith Hickey, chief executive of the Charity Finance Directors' Group, doubts the Government would remove all charity tax breaks, because the work of the voluntary sector benefits the taxpayer in the long run. "If charities did not do the work, it would fall on government and cost taxpayers even more," he says. "It would be a brave government indeed to do away with charity tax exemptions."

A clearer picture of how far charity tax exemptions have been eroded should emerge in early 2010 when the Charity Tax Group publishes the results of an assessment of the effect of tax law on charities.

"This will look at the tax burden on charities and at the hoops that charities have to jump through to get exemptions," says Helen Donoghue, director of the organisation.

The group is also working with the Charity Law Association to look at the historical and legal position of charities in relation to tax. This, Donoghue says, "will help inform our lobbying effort".

Charities already have the support of the wider taxation lobby group, the Taxpayers' Alliance. Susie Squire, the pressure group's campaign manager, says: "Tax relief for charities is even more important in a recession, when they are busiest. The tax system should help them, not hinder them."

But Ben Wittenberg, director of policy and research at the Directory of Social Change, fears the recession could present charities with further problems. As they increasingly compete with private firms for government contracts, calls from the business lobby for a level playing field regarding taxation will get louder, he says. "As the pot shrinks, the fight to get money will get even tougher and charities will have to fight harder than ever on issues such as VAT recovery."

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