Changes called for as irrecoverable VAT costs reach almost £2bn a year for UK charities
Melanie May | 3 December 2020 | News
Irrecoverable VAT is now costing charities £1.8bn a year according to new research by London Economics and commissioned by the Charity Tax Group.
The research highlights the fact that, because charities cannot always pass on the cost of VAT, they are unable to recover the VAT on their purchases in full, which can result in having to use charity funds, which could be used to help beneficiaries, to pay VAT bills instead.
To tackle the increasing VAT burden, the Charity Tax Group is calling on the Government to introduce a new special charity VAT rate on purchases, to complement existing reduced and zero rates and the social exemptions. The proposal would benefit all charities, and could be adjusted depending on economic circumstances.
In its report, Charities and VAT: an evaluation, it calls for VAT reform for charities in response to new research from London Economics: The value of VAT reliefs for the charity sector. The research quantifies the value of existing VAT reliefs on purchases (£0.8bn) and the impact of VAT on charity sales and service delivery. It also demonstrates the total tax contribution made by charities, which amounts to £10.12bn a year and quantifies the reliefs available to them.
Launching the research, John Hemming, Chairman, Charity Tax Group, commented:
“The research is very timely: there are various reviews underway looking at how VAT should operate after Brexit. Charities benefit from some important reliefs, but also incur significant irrecoverable VAT. There are both opportunities and risks for the sector as we need to protect the reliefs that we currently have and we also need help with the increasing cost of irrecoverable VAT.
“For too long, VAT has been a burden on charitable activity: we have looked at ways to solve the problem and are proposing the introduction of a special VAT rate for charity purchases. This would result in significant VAT savings for all charities and free up funds for essential services. This is a clear and practical solution to address this problem and support the valuable work UK charities are doing on behalf of us all.”
Rohit Ladher, Associate Director, London Economics, added:
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“As charities face unprecedented challenges (not least due to the ongoing Covid-19 crisis) and opportunities (for example with the UK’s departure from the EU), it is important to remind ourselves of the value generated by charities in the UK. While charities benefit from certain tax reliefs and exemptions, this study highlights the significant tax burden they continue to face.”
CTG will be submitting its proposal to the Treasury Select Committee Inquiry on Tax after Coronavirus and as part of its next Budget Submission.
Irrecoverable VAT has long been an issue for charities – here’s more on the topic:
- Irrecoverable VAT campaign uses Number 10 petition site March 2007
- Tax Reform Group shows public support for charities’ VAT campaign October 2005
- 100 MPs declare their support for VAT campaign March 2003
About Melanie May
Melanie May is a journalist and copywriter specialising in writing both for and about the charity and marketing services sectors since 2001. She can be reached via thepurplepim.com.