Give charities a special VAT rate to ease £2bn burden on the sector, report urges

Charities should be given a special VAT rate on purchases in order to reduce the almost £2bn a year burden faced by the sector, a new report suggests.

Research commissioned by the Charity Tax Group shows that irrecoverable VAT costs charities £1.8bn a year, part of a total tax contribution made by UK charities of more than £10.1bn a year.

In a report called Charities and VAT: An Evaluation, published today, the CTG says the government should introduce a special charity VAT on purchases, to complement existing reduced and zero rates and social exemptions.

It said the premise would be simple, would benefit all charities and could be raised or lowered, depending on economic circumstances.

The CTG said Brexit meant that one of the major obstacles to radical reform of the VAT system had been removed, because EU VAT harmonisation rules no longer applied.

“One of the simplest, easiest to administer and most effective ways of resolving the charity VAT problem would be to build on the well-established, charity-specific zero rates that already exist by introducing a supplementary special charity VAT rate on other purchases, which ideally would be set at zero per cent but could be adjusted according to economic circumstances,” the CTG report says.

“A lower rate of VAT on purchases would allow charities to spend more in support of their charitable aims of providing much-needed services – something that would be particularly helpful as part of the recovery from the Covid-19 pandemic.”

The CTG said a key benefit of this proposal was that it would be extremely simple to introduce, because it would just involve adding another schedule to the VAT Act 1994, and so could be introduced very quickly.

The report says the value of existing VAT reliefs on purchases for charities is about £800m year.

The figures for the report were calculated by the consultancy London Economics, and have been published in a separate paper called The Value of VAT Reliefs for the Charity Sector – also out today.

John Hemming, chair of the CTG, said: “Charities benefit from some important reliefs, but also incur significant irrecoverable VAT.

“For too long, VAT has been a burden on charitable activity. We have looked at ways to solve the problem and are proposing the introduction of a special VAT rate for charity purchases. This would result in significant VAT savings for all charities and free up funds for essential services.”

The CTG said it would submitting the proposal to the Treasury Select Committee inquiry on tax after coronavirus and as part of its next Budget submission.

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