David Cameron will discuss VAT treatment for charities with the Treasury

The Prime Minister says charities could be funded in a similar way to the public sector

The government should consider funding charities on "the same basis that the government funds itself", according to Prime Minister David Cameron, answering a parliamentary question on VAT.

Cameron was responding to a question from Bob Russell, the Liberal Democrat MP for Colchester, during Prime Minister’s question time in the House of Commons yesterday. Russell asked whether Cameron would discuss with the Treasury how the planned increase in VAT from 17.5 to 20 per cent could be refunded to voluntary organisations.

"I will certainly have those conversations with the Treasury," said Cameron. "We will want to do everything we can to help what used to be called the third sector, and should be the first sector in my view.

"One thing we should do is look at funding them on the same basis the government funds itself."

At present, the government refunds VAT paid by local authorities and central government departments. Charities have campaigned for many years to receive the same VAT treatment.

On Tuesday evening the House of Commons voted against a proposal by Liam Byrne, shadow chief secretary to the Treasury, to protect charities from the extra cost of VAT on their non-business expenditure, which he said would save the sector about £70m.

The Charity Tax Group has estimated that the total cost of VAT to charities is more than £1bn a year.

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