Government will consult on VAT exemption for charities that share back-office functions

Substantial donor legislation and Gift Aid remain on the radar in the Budget

The government has pledged to carry out a formal consultation this autumn into providing a VAT exemption for charities that share back-office functions.

Documents released as part of the Budget also reveal that there will be some progress on the reform of substantial donor legislation and that the government has repeated its commitment to making changes to Gift Aid.

At present, if charities set up a joint venture to provide services such as human resources or IT, they face a VAT charge that often makes it uneconomic to do so.

The previous government had already begun an informal consultation on the effects of this charge and how it might introduce an EU directive requiring governments to give exemptions to charities.

Today’s Budget document says: "Recognising the efficiencies that can be achieved by organisations such as charities sharing services and the potential VAT barrier that exists, the government has started discussions with charities and other affected sectors to consider options for implementing the EU cost-sharing exemption. It will continue those discussions and launch a formal consultation in the autumn."

The Charity Tax Group, which campaigns for charities on tax issues, said it had been campaigning for the government to apply the exemption for a long time, and earlier this year presented evidence showing the effect of the tax on charities.

The government has also made a commitment to reform existing laws on substantial donors that aim to ensure people who donate to charities do not receive benefits in return.

The law is likely to be changed to include a test of the purpose of donations and to penalise donors, rather than charities, for illegitimate transactions.

HM Revenue & Customs will consult informally on draft clauses in the summer, with a view to publishing final legislation in the autumn, the Budget document said.

The Budget documents also pledge that the government will continue to explore with voluntary sector representatives ways to improve the Gift Aid system and encourage charitable giving.

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