A taxing problem

An independent commission has been set up to suggest ways in which the tax system can be improved for charities. So what are the issues it needs to address?

< This article has been amended; see final paragraph

Charities benefited from an impressive £3.7bn of tax reliefs in the financial year to March, which included claiming a substantial payment of £1.27bn in Gift Aid from government. But although there is no doubting that the existing tax system brings huge benefits to the sector, it also places burdens on it. Each year the charity sector loses out on about £1.5bn of so-called irrecoverable VAT - the VAT charities cannot recover on their purchases to support their charitable activities.

In October, the National Council for Voluntary Organisations created a new charity tax commission to carry out the first full review of the charity tax system in 20 years. Over the next 18 months, the commission will develop recommendations to put to government. Chaired by Sir Nicholas Montagu, a former chair of the Inland Revenue, the commission includes seven tax and charity experts from a range of bodies.

The commission will try to answer four key questions: what are the principles underpinning charity taxation? Does the existing tax system reflect those principles? How does the charity tax system generate public benefit? And could it do that better? It will put out a public call for evidence soon, but the nature of some of the reforms the sector is likely to push for is already clear.

The Charity Tax Group has long campaigned for a number of changes in charity tax law. In its last Budget submission, which was published on its website in September, the CTG prioritised issues such as tackling irrecoverable VAT, including a wider strategic review of the VAT system in the UK, and the administrative burden of dealing with the demands of the charity tax system and keeping suitable records.

Other issues that were included by the CTG were simplifying the Gift Aid donor benefit rules - which cover when charities can and cannot claim Gift Aid on donations from which the donor receives a benefit - and exempting charities' trading subsidiaries from HM Revenue & Customs' Making Tax Digital reporting requirements. Charities themselves are already exempt from having to use HMRC's new digital filing system for corporation tax, but not VAT.

Most of the nasty problems and messes small charities get into are to do with VAT

John O'Brien, chief executive, Community Accounting Plus

But it appears that of all the tax issues facing charities, VAT will be the most important for the tax commission to tackle. John O'Brien, chief executive of Community Accounting Plus, which helps to promote good management in small to medium-sized charities, says the biggest issue by far is irrecoverable VAT, which he says needs to be made much simpler for charities, especially those that are unable to access professional advice. "VAT is a big annoyance and extremely complicated," he says. "Most of the nasty problems and the messes small charities get into are to do with VAT. And good advice is very expensive to come by."

With Brexit on the horizon, the government will have opportunities to repatriate and reform European Union VAT regulations, including introducing zero rates for the charity sector. O'Brien says that the government should take the opportunity to improve the VAT rules for charities.

Andrew O'Brien, head of policy and engagement at the Charity Finance Group, says the tax commission needs to address the big and long-term issues. "Any review that ends up becoming about what politicians would be ok with us having, or what it would be ok to get, is not going to help anybody," says O'Brien. He says the charity sector has to be honest about what it wants to see. He believes the tax commission should prioritise structural issues, such as VAT reform, rather than shorter-term issues that the government can correct fairly easily, such as exempting charities from the insurance premium tax.

Importantly, he sees the review as an opportunity for the charity sector to make the case for a more understanding and supportive tax treatment from government. "I think the government has started to forget why we have tax reliefs for charities in the first place, which is to free resources to do more good," says Andrew O'Brien. "When we see things such as the apprenticeship levy, I think that 10 to 15 years ago it would have carved out an exception for charities. Now it doesn't. We need something that is going to reset that relationship."

< This article originally said that charities were exempt from Making Tax Digital, but this will only be the case for corporation tax and not VAT.

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