Editorial: Let's hope 2007 is the year of VAT reform

It has, by any standards, been a remarkable year for the voluntary sector, writes Third Sector editor, Stephen Cook.

So many pieces of the jigsaw have been put in place that the picture envisaged by Nicholas Deakin 10 years ago is almost visible - it's a picture of a sector with a more coherent legal framework, an improving infrastructure and a more just relationship with national and local government.

Tribute is due to the hard work and persistence of the campaigning organisations and to those ministers and officials who have responded positively. The backing of Tony Blair and Gordon Brown, in different ways, has been crucial.

But as everyone slaps each other on the back and drifts away to hang the baubles on their Christmas trees, there is an elephant standing in the corner of the room with the word VAT tattooed on one of its large flapping ears. No one wants to talk about it much, not least because ministers have been known to turn beetroot-coloured and start reading the Riot Act at the very mention of the word. But this is a major piece of unfinished business and a vital part of the aforesaid jigsaw: the VAT system does not treat charities fairly, and there is a powerful argument for reform.

The Government's case, in its simplest form, is to say: "We gave you Gift Aid instead of VAT reform and you don't even take full advantage of it. We've explained several times that it's too difficult to devise VAT reforms that are practical, affordable, well-targeted and based on principle. We're going instead for targeted public spending and use of existing reliefs. So please stop banging on about it."

One suspects that the crucial word here is 'affordable' - an increasingly cash-strapped Treasury, quite understandably, is not going to relinquish £500m or more without a fight.

But there's no getting round the fact that charities are penalised in a variety of ways, especially when they compete to provide public services with local authorities, which get special relief from VAT. The Government's commitment to full cost recovery is all very well, but can it really work without a fair solution to the VAT problem it inevitably throws up?

There have apparently been recent signs that ministers' doors are slightly ajar rather than locked shut, which is welcome news. The challenge for all concerned is to get into a constructive dialogue and find a way forward.

And if 2006 has been the year of the Charities Act, perhaps 2007 can be the year of VAT reform.

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