The government's support for charities is not unconditional

The message from the spending review and ministerial statements is a mixed one, writes Stephen Cook

This government values charities and the work they do. We know this because the Treasury minister Damien Hinds said so in a recent interview with Third Sector. He emphasised that ministers want to work in partnership with charities, feel that good progress had been made since 2010 and accept that more remains to be done.

Beyond these warm words, however, Hinds had nothing of substance to say in answer to specific questions that worry charities most at present. The future of the business rate rebate, improvement of the Gift Aid Small Donations Scheme, uncertainty about Gift Aid after devolution of income tax rates to Scotland and the perennial ache of irrecoverable VAT – queries about these were all were stonewalled, some with signs of irritation.

To be fair, the minister’s lips were sealed by the approach of the combined autumn statement and spending review (which raises the question why he sought the interview when he did, rather than when there could have been something to announce). But now that his boss George Osborne has unburdened himself, the answer to the key questions put to Hinds is still "wait and see."

The Chancellor did, however, make some announcements that will be helpful, or potentially helpful, to the sector: the law will be changed to protect charity trustees from taxation of "close company" loans; the expansion of the National Citizen Service and the extra £80m to boost social impact bonds will bring opportunities for third-sector providers; and a further £25m will be distributed to military charities out of the fines levied on banks for manipulation of inter-bank lending rates.

Osborne also unveiled two VAT-related measures that set antennae twitching among charity tax experts. The first was a £15m fund for women's charities, equivalent to the VAT raised annually on sanitary products, while the government continues to argue in Brussels for such products to be zero-rated: this was a laudable attempt to make the best of a bad situation. The second was permitting sixth-form colleges to convert to academy status to avoid having to pay irrecoverable VAT.

The Charity Tax Group pointed out that if zero-rating was being pursued for sanitary products in Europe, it could also be pursued for charity activities generally. It also argued that the move on sixth-form colleges was an admission that the VAT system caused distortions that strengthen the case for VAT refunds (which are permitted under European regulations) to charities that provide public services in competition with public-sector suppliers that are spared VAT.

It would be unwise, however, for the sector to conclude that significant changes to VAT are in the pipeline. More than a decade of pressure and persuasion has brought scant results. Experience suggests that the government is unlikely to go further than occasional, piecemeal refunds of irrecoverable VAT, similar to those announced in the past for hospices and fuel costs for air ambulances.

When the chips are down, ministers in successive governments have resisted any real softening of the tax regime for charities, pointed out that they already get billions in tax relief and suggested that they make better use of Gift Aid. This is no doubt what Hinds meant when he said, firmly: "The vehicles that are used are the ones we consider to be the best ones to use."

There’s no doubt, as he asserted, that the government does value charities, particularly insofar as they help to ease the social pain of austerity. But there is also a message in the air that charities shouldn’t get in the way of government policy. It was only a year ago that George Osborne told the Institute of Directors that "you have to get out there and put the business argument, because there are plenty of pressure groups, plenty of trade unions and plenty of charities and the like, that will put the counter view".

The message coming through from the government as a whole is not so much unconditional support – "we like you for what you are, no matter what you do" – so much as qualified support – "we like you as long as you do what we like". There is always an element of this in the relationship between government and charities, but it feels particularly pronounced at the moment.

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