Charities are unlikely to be able to make use of a VAT exemption on shared services that HM Revenue & Customs plans to introduce, members of the Charity Finance Directors’ Group heard yesterday.
HMRC and HM Treasury are consulting on proposed rules that would allow VAT recovery on shared services by organisations that cannot normally recover the tax, including charities, universities, banks and insurance companies.
Charities are hoping the rules will remove what the Charity Tax Group calls an "artificial VAT charge" that can make it prohibitively expensive to set up an organisation to share services between charities.
But David Bond, senior policy adviser at HMRC, told the CFDG’s London members meeting that the rules for shared services were unlikely to cover the ones that most organisations most wanted to outsource, including payroll, HR and IT, because such functions were not legally defined as "directly necessary".
He said organisations that can recover none or "a small proportion" of their VAT may be able to take advantage of the exemption. A definition of "a small proportion" had not been decided, he said, but it could be as much as 15 per cent of total VAT.
However, the exemption would not be available to organisations that had a mix of business and non-business activities unless they could prove that the shared services were only used for non-business activities. Usually VAT can be recovered on business but not non-business activities.
Ian Theodoreson, the newly-elected chair of the CFDG, said at the meeting that he had "died a little inside" when he heard the ‘directly necessary’ rules.
"It’s clear that companies such as BP and Shell can share all their services to create better value for their shareholders, without being taxed, while we as charities cannot do the same for the benefit of our beneficiaries, and that grieves me," he said.