Chancellor Gordon Brown announced that local authorities that provide childcare or run children's centres will be able to recover the VAT they incur. Children's charities now say they have been put at an unfair disadvantage and could become uncompetitive.
The services have been reclassified as 'non-business' - which, under special rules applying to the public sector, means that all VAT can be recovered.
But the same concessions have not been granted to the voluntary sector, prompting fears that charity providers could become more expensive than statutory rivals.
"Where these services are provided by a charity, they are likely to be exempt from VAT - thus VAT incurred on related costs is irrecoverable," said Russell Moore, charity VAT partner at accountants Saffery Champness.
"As these services are state-regulated, it is not possible for the charity to charge VAT on them by putting them through a trading subsidiary."
Moore warned: "Charity providers are clearly put at a disadvantage and may become uncompetitive. The likelihood is that local authorities will in future consider providing these activities in-house due to the VAT advantage they will gain by doing so."
Ian Theodoreson, director of finance and corporate services at Barnardo's, said the affair "makes a mockery of the Government's stated desire for the charity sector to take on more service provision. This simply underlines the argument put by the sector for many years that there is no level playing field when it comes to VAT."
The changes will affect charities that run services such as children's homes. Charities have to pay 17.5 per cent VAT on costs such as the purchase of toys, but this tax will be waived for statutory providers. It is estimated that a single charity-run children's home could be tens of thousands of pounds worse off than a local authority home because of the changes.
George McNamara, policy advisor at NCH, said: "We will be lobbying the Government on this issue to make sure the valuable contribution made by the voluntary sector in providing child welfare services is not unfairly squeezed out."
- In the recent Budget, Gordon Brown announced that local authorities providing childcare will be able to recover VAT on incurred costs
- Charities providing the same services are exempt from VAT and so unable to reclaim any related costs
- Because of this, charity providers fear they will become more expensive than their statutory rivals
- If this happens, the likelihood is that local authorities will return to in-house provision as a way of keeping costs down
- Ian Theodoreson of Barnardo's said this "makes a mockery" of the Govern-ment's desire for more charity sector provision.