Campaign: Irrecoverable VAT
The third sector is recognised by the Government as having a vital role in the delivery of high- quality public services. The tax system should therefore support and encourage the efficient and effective use of charitable funds, but it fails to do so in many areas of charitable activity. When Value-Added Tax (VAT) was first introduced, it was intended to be a simple, fair and uniform tax. However, when the original VAT system was developed, the special position of charities was not considered. Because they provide services that are either exempt from VAT or outside the scope of the VAT system charities are unable to get back the VAT they pay on their expenditure on supporting their charitable aims. They are, in effect, treated as the final consumer, even when they are not.
Irrecoverable VAT costs charities between £400 and £500 million a year. This money could better be spent on providing charitable services, particularly as it widely accepted charities spend their money more cost-effectively than government.
Studies in Ireland, Denmark and the UK, indicate that charities are paying around 4% of total expenditure on VAT. For some charities, the percentage is much higher. For instance, Action for Blind People pays 5.8% of its total expenditure on VAT. Even a charity like the RNLI, which benefits significantly from zero-rates, spends 3.2% on VAT.
What charities are seeking
Charities are calling on the Government to compensate them for all the irrecoverable VAT they pay. This approach was recently endorsed by the EU Tax Commissioner, Laszlo Kovacs, in a speech to a conference in Brussels [September 2005] organised by the European Charities' Committee on VAT, in which he stated:
"The more feasible option is to address this problem outside the VAT system. This is an approach which has been adopted in some Member States which have put in place mechanisms for reimbursing to charities some or all of the VAT they have been charged."
The Commissioner confirmed that such a scheme was compatible with EU legislation and stressed that:
"the decision to set up such a refund mechanism is strictly a national budgetary issue over which the Commission has no say or influence."