Campaign: Irrecoverable VAT

• Introduction
• The problem
• Priority areas
• Parliamentary Launch
• Public support
• Case studies
• Next steps

Priority areas

There are four priority areas where a matching grant scheme is most needed:

VAT on social welfare services, where charities are complementing or substituting for state provision

When they provide social welfare services that substitute for or supplement state provision, charities should be compensated for the VAT they pay in providing these services. It is counter-productive to take resources from charities which are performing a public service. This would give charities parity of treatment with other service providers, such as local authorities, and ensure that there was no discrimination or distortion of competition.

Solution: s33 relief of the 1994 VAT Act should be extended to charities substituting for or supplementing state provision of social welfare services and to the charitable funders of such services (grant-makers).

VAT on fundraising costs

Charities benefit enormously from the range of tax incentives on giving, particularly Gift Aid. The latest Government statistics show that charities reclaimed tax of £586 million on Gift Aid donations in 2003-2004 but they incur substantial amounts of tax when they spend the money that is generously donated. It is illogical and unfair that charities are encouraged to invest in fundraising activities and for tax relief to be given on donations only for that money to be taxed when it is spent. The Government has urged charities to make full use of the incentives it has provided to encourage charitable donations, but it penalises most heavily those charities which are working hardest to raise funds to meet their charitable objectives. In 2003/4 Oxfam spent £18.9m on fundraising and lost £1.3m through irrecoverable VAT in the process.

Solution: a matching grant to cover VAT on fundraising costs, which could be reinvested directly in fundraising.

Joint ventures and shared services

The Government has also actively encouraged charities to work together and share costs and services but the VAT system penalises those that do. If one charity supplies services to another it has to charge VAT on the supply but the charity paying for the services cannot recover the VAT. This is an additional cost which prevents charities from actively seeking economies through shared services. Clearly this is an example of there not being a level playing field between the charitable sector and the public or commercial sectors where sharing services is a common method of reducing support costs.

Solution: The Government could overcome this problem immediately by implementing the exemption in Article 13 A(1)(f) of the EUÕs Sixth VAT Directive - something it is required to do under EU law.

Repair, construction and maintenance of social welfare housing and all charitable buildings

For many UK-based charities, the greatest VAT cost comes from repairing, upgrading and maintaining the buildings in which they provide their services. These range from social- welfare housing units to specialist centres for the care of severely-disabled people or, for instance, for the rehabilitation of blind people.

Solution: a matching grant scheme to cover the cost of such building work, which could be directly reinvested in further building work.