NEWS IN FOCUS: VAT policy needs radical overhaul - How can the Government justify a policy that takes £1 billion from charities a year? And is there a middle way, asks Mathew Little

MATHEW LITTLE

If charities could recover the VAT they pay, Help the Aged could buy 15 specially-adapted extra minibuses to help elderly people get out of their homes and Macmillan Cancer Relief could fund another 30 nurses.

Marie Curie Cancer Care alone pays £1.2 million a year in VAT, Leonard Cheshire pays £800,000. For the sector as a whole, the 17.5 per cent paid on providing free services and costs related to exempt business activities, is close to £1 billion a year, according to a new calculation by VAT specialist Russell Moore at accountants Saffery Champness, rather than £400 million as was previously thought (see Third Sector 20 March).

The Government's stance on VAT is incongruous at best and at worst bizarre.

While the Treasury has introduced significant tax reliefs on giving and set up the Giving Campaign, it seems intent on taking back most of the extra income through VAT. "The charity sector contributes significant resources into the Treasury through VAT charges that themselves are funded by public donation - amounting to a tax on charitable giving,

says Geoff Miller, finance director at the British Red Cross and chairman of the Charity Finance Directors' Group.

Yet ministers seem intransigent on the issue. Paul Boateng, financial secretary to the Treasury, bluntly told delegates at last year's Charities Aid Foundation conference that the Government couldn't give the sector a VAT rebate because it needed the money.

Abolition of the sector's VAT bill seems a non-starter. But Boateng has hinted that the Government could be swayed on targeted relief for some charities, for example, those providing public services.

There are precedents. In last year's budget, chancellor Gordon Brown allowed museums that don't charge entrance fees to claim back VAT. Churches and other places of worship also benefited from a grant on repairs that effectively reduced the VAT they pay for repairs from 17.5 per cent to 5 per cent. The Church of England's VAT repair bill was cut from £23 million to £8 million a year.

The door appears to be ajar and the sector has practical solutions to VAT that could prise it open further. The Charity Tax Reform Group advocates replacing VAT exemptions on business activities such as education, welfare, health and one-off fundraising events with a super-reduced rate. Charities would charge VAT on services at 2 or 3 per cent, but claim back VAT on the costs on providing those services at 17.5 per cent. According to the tax reform group, charities would not have to charge extra for their services.

The group is also calling on the Government to introduce a full or partial refund for charities that pay VAT on services they do not charge for, as is the case in New Zealand.

"We are not asking for any more than has been taken away,

says Nick Kavanagh, chairman of the group and acting finance director at Save the Children. He is referring to the abolition of Advanced Corporation Tax credit, introduced by Labour in 1997, which costs the sector around £500 million a year.

"This package of measures will achieve mass simplicity and get round the sector's financial burden. If the Government is saying it can't afford the amount it has taken away, we should get partial relief or something brought in over a number of years,

says Kavanagh.

But the most likely concession on VAT, given the Government's enthusiasm for charities to provide more public services, is targeted relief for charities providing contracted-out services for local councils and health authorities. Despite backing from NCVO, the Charity Tax Reform Group opposes the compromise as divisive.

"There is a danger of picking and choosing between types of charity,

says Kavanagh. "Does the RNLI deliver services? Not strictly, but the Government has a mandate to provide lifeboat services. But if you target pure-service delivering charities, RNLI will be excluded.

"Targeted exclusion would create different classes of charities and is not fundamentally fair."

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