VAT is one of the great bones of contention between the voluntary sector and the Government. Charities have long argued that they should qualify for VAT relief. But Paul Boateng, financial secretary to the Treasury, admitted last year that this was out of the question. The Government simply can't afford it.
The situation has been aggravated by the Government's increasing enthusiasm for greater voluntary sector involvement in the provision of public services.
Public sector bodies are entitled to VAT relief for which charities don't qualify. It's hard for a voluntary sector organisation to put in a lower bid for a contract if it is paying VAT and its competitors aren't.
The Treasury is looking at the role of the voluntary sector in the provision of public services as part of its spending review due out in the summer.
It may recommend that organisations involved in public service provision should qualify for some kind of VAT relief.
In 2000, the Government expanded Gift Aid, allowing charities to claim back more tax on donations. It has also been encouraging the public to give to charity through tax relief introduced in the budget 2000 and through £1 million funding for the Giving Campaign. But it seems any extra money coming in from these initiatives is rapidly being clawed back through a VAT bill that now appears to be far higher than any of us had thought.
It's £1 billion, according to the latest calculation, instead of the £400 million figure that the National Council for Voluntary Organisations and others have been using in their lobbying of the Government. And that could go up by another £150 million if chancellor Gordon Brown increases VAT in the Budget.
The Government could always compensate for this by introducing more tax breaks on donations, perhaps by extending its 10 per cent supplement on payroll giving beyond April 2003, or introducing incentives for company giving. But by far the best thing would be to sort out an unfair VAT situation, at least as it relates to the public sector services that charities provide.