Technical briefing

The future of VAT

Finance | 31 Jan 2012

Chris Lane analyses what impact the European Commission's consultation on the future of VAT may have on charities.

Following its consultation on the future of VAT, which closed in May 2011, the European Commission has now issued a communication, outlining the reforms it proposes to the VAT system. Significantly for the charity sector, the communication clearly acknowledges that VAT is a burden for charities. This follows an extensive campaign by the Charity Tax Group (CTG) and its European partners after the position of charities was ignored earlier in the consultation process.

The communication calls on member states to make use of the existing options to alleviate the burden of VAT on non-profit-making organisations and explicitly suggests that the use of targeted refund schemes should be adopted by member states as the most straightforward option for solving the VAT problems of charities. It is disappointing that no new solutions have been proposed given that member states have been historically resistant to this idea, largely on cost grounds.

At the same time as arguing that the sector has some protection from the existing social exemptions, the Commission is also looking seriously at the option of bringing everything within the VAT system and gradually withdrawing exemptions. It is clear that bringing charities within the tax system could present major difficulties for those people that charities are trying to help and support, who could not bear a 20 per cent increase in the costs that they have to pay. This option also further isolates those charities that do not charge for their services as there would be no mechanism for helping them with the burden of irrecoverable VAT.

The sector will be monitoring the position very carefully and preparing for all eventualities. A key task will be to quantify the value of the exemptions and to estimate the costs of different types of reform to ensure charities are, as an absolute minimum, no worse off than they currently are.

Chris Lane is policy officer for the Charity Tax Group

Directory: Charity Tax Group