Charities could be hit with higher VAT bills if the UK adopts new rules proposed by the European Commission, according to a VAT expert.
The commission has asked the UK and seven other countries to change their VAT group legislation, which allows associated organisations to be treated as a single body for VAT purposes.
The proposed changes would mean that non-taxpaying organisations could not form a group with taxpaying organisations. This would prevent charities from being able to provide or receive services from their subsidiaries, such as trading arms, without charging VAT, which they would then be unable to reclaim.
"If the UK does decide to change the law, this would have an adverse VAT impact on many charities and not-for-profit organisations because they carry out significant non-business activities and business activities that are exempt from VAT," said Debbie Jennings, director of VAT at accountancy firm PKF.
She said the blow could be softened if the UK were to introduce legislation that allowed no VAT to be charged on cost-sharing arrangements.
The legislation already exists in EU law, but has not been implemented in the UK.
Jennings said: "The new threat to VAT grouping might spur charities to intensify pressure on the Government to introduce the cost-sharing exemption in the UK."
She said the proceedings were at any early stage, and might require a case in the European courts before legislation changed.