VAT hike set to 'clobber' sector

UK charities face a £500 million increase in their VAT bill following plans by the European Commission to change tax rules.

Service-delivery charities and those with large chains of shops will be hardest hit if proposals to abolish many zero rates on VAT are adopted.

The Charities' Tax Reform Group is urging the Government to use its EC veto to prevent the changes. But it fears ministers' unwillingness to ease the sector's VAT burden does not bode well.

Chairman Nick Kavanagh said: "If ministers do not take action, the charity sector will be paying £1 billion a year in VAT and associated compliance costs. Now is the time for ministers to demonstrate support for the sector by vigorously defending the zero rates."

Under the proposals, goods sold in charity shops would no longer be zero-rated, so instead of receiving all the proceeds for the sale of a £2 item, charities will lose around 35p to the Treasury.

Kavanagh, who is also finance director at Save the Children, estimates his charity would lose £650,000 a year from its 140 shops. He predicted those charities with more shops, such as Oxfam and Cancer Research UK would face "a massive impact on their profitability".

Services that charities buy will also be affected. Building work, the installation of lifts, ambulances, equipment for the disabled and first-aid equipment could all be hit. So could advertising, which would hurt children's groups.

Ian Theodoreson, director of finance at Barnardo's, said the loss of zero rating would force the charity to raise prices by 17.5 per cent.

"We'd also face a bill of around £800,000 a year on advertising and building work," he said.

The European Commission will exempt some activities from the abolition of zero rating. "But a lot of the things that affect charities aren't included and we are going to get clobbered," said Kavanagh.

The plans need unanimous backing from the Council of Ministers to be adopted. A Treasury spokesman said: "The UK Government will play an active role in the discussions on this issue between member states and is pledged to maintain zero rating on children's clothes, food, books and passenger transport."

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