FINANCE NEWS: War costs scupper Budget hopes

Patrick McCurry & Mathew Little

With the Government distracted by the uncertain cost implications of the war in Iraq, charities are not expecting largesse from the Chancellor in today's Budget (Wednesday).

The costs of the conflict, the rebuilding of Iraq, falling stock markets and the economic slowdown are expected to limit Gordon Brown's room for manoeuvre.

"The political and financial situation is so complicated that we don't expect a lot for the voluntary sector," said Helen Donoghue, administrator at the Charities Tax Reform Group.

Les Jones, vice-chair of Charity Finance Directors' Group, agreed: "There are probably other things on the Chancellor's mind at the moment."

Despite the current uncertainty, the voluntary sector has a considerable "wish list" from the Government. One familiar issue is the irrecoverable VAT burden faced by charities, a fundamental benefit of which the sector is still deprived, according to Jones.

He accepts that the current tight public finances and political uncertainty mean that it is unlikely the Chancellor will do anything about it this year. "But he could announce that we will get it back in the next financial year or in 2005," said Jones.

Donoghue supports the call, arguing that the problem is not only the huge financial cost but also the fact that irrecoverable VAT continues to be an obstacle to innovative ways of working.

"It prevents charities sharing or outsourcing services because there can be serious VAT repercussions if they go down that route," she said.

Another item on the wish list is protecting charities from the increase in national insurance payments that came in this month.

Unlike commercial organisations, charities cannot offset NI against corporation tax and are unable to pass on the additional charge through increased prices for services, said Donoghue.

When the NI increase was announced in the last Budget the Chancellor softened it for small businesses by reducing their corporation tax and not taxing any profits below £10,000.

"No such softening is available to the charity sector and this increase will inevitably impact on service delivery," she said.

Again, Jones argued that if the Chancellor feels he is unable to commit himself to a softening of the NI increase this year, he could announce his intention to do so before the next election.

Another item that Donoghue believes could be covered is the call for a preservation of transitional relief on advance corporation tax, which is reclaimed on share dividends.

This relief is being phased out and currently stands at 8 per cent. "We'd like it maintained at this level or perhaps slightly higher, at 10 per cent," said Donoghue.

Jones added that it would be welcome if some of the Strategy Unit report on the sector, such as no longer requiring charities to form a trading subsidiary in order to trade, were included in the Budget.

He also would like to see amendments made to Gift Aid rules. "Charities have to keep lots of records for the Inland Revenue. Charities have to get a declaration that donors are tax payers. The Government could just give charities tax back for donations that are received."

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