OPINION: Thinkpiece - Why we won't extend charity VAT exemptions

John Healey, economic secretary to the Treasury

Two billion pounds a year in tax relief, including £200 million worth of VAT zero rates and exemptions, the £125 million Futurebuilders fund and the recently announced Corporate Challenge to increase the number of companies involved in the community - that gives some idea of the importance the Government gives to the voluntary sector.

As reported in this magazine, the Charity Finance Directors' Group sent me a letter suggesting that my position on the potential to extend charitable VAT reliefs had been contradicted by an official in the European Commission (Third Sector, 2 July). I want to explain why the CFDG's letter is misleading.

While we have been able to extend the scope of our direct tax reliefs, the long-standing formal agreements which govern the EC VAT regime do not allow us to extend the scope of our zero rates or exemptions.

Instead, many charities argue the Government should give the sector an annual grant equivalent to their irrecoverable VAT bill. In the 1999 review of charities' taxation and again in the cross-cutting review last year, we looked carefully at the case for such a grant scheme. If either review had concluded that this was an affordable, efficient or principled solution, we would have accepted that conclusion. But they did not.

However, nowhere have we said that the EC VAT rules prevent us from introducing such a grant scheme. The CFDG accuses the Government of "hiding behind" EC VAT rules in rejecting such a scheme, but this is simply untrue. What we have said is that EC VAT rules do not allow us to extend our zero rates and exemptions, as of course the commission confirms. The supposed "contradiction" highlighted in the CFDG's letter was a wilful or unwitting comparison of apples with pears.

The CFDG also points out that the £125 million Futurebuilders fund is not the same as the estimated £400 million irrecoverable VAT bill faced by the sector. This is precisely because that funding is targeted at the key challenges affecting service delivery by the voluntary and community sector, and thus strikes a balance between our desire to support that work and the need to fund other priorities in a way that a blanket grant scheme could not do.

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