Give the sector back its irrecoverable VAT, says select committee2

Governance | Vibeka Mair | 14 Dec 2011

If the government is serious about getting charities to help create the Big Society, it should give the sector back its irrecoverable VAT, an influential committee of MPs has recommended today.

The Public Administration Select Committee has published its final report into the Big Society, which has been written over the past seven months following a number of consultations with stakeholders including the chief executives of Navca, NCVO and Acevo.

The PASC makes a total of 30 recommendations in its report, including that government "should extend the eligibility for the VAT refund scheme which currently applies for public sector bodies, to charities who deliver public services under a contract with a public sector organisation".

It also suggests implementing an impact assessment for each government policy, statutory instrument, and Bill, which answers the following question: "What substantively will this do to build social capital, people power, and social entrepreneurs?”

Focus on voluntary sector

Much of the report focuses heavily on the voluntary sector, recommending greater clarity of the roles of charitable, private and public providers of public services.

A key tenet of the government’s Big Society agenda is the involvement of more charities in public service delivery. But the Committee says it is unconvinced that the government is doing anything to ensure that smaller charities can compete fairly to deliver public services.

It urges government to develop a plan to address this across Whitehall, and warns that without reform, the Big Society will fail.

The PASC says that government ministers must make clear to commissioners whether they wish them to prefer the voluntary sector over offers of potentially better value.

Spending cuts

It also says public funding cuts to charities risk alienating organisations that may want to participate in the Big Society.

And it voices doubts about social investment, which the government is promoting as a new way to fund the social sector.

The Committee warns that Big Society Capital, which it calls genuinely imaginative social innovation, is as yet an unproven concept and large-scale effects will take a decade or more to bear fruit. The report adds that it will not do much to solve the funding crisis for smaller charities who do not wish to take out loans.

A minister for Big Society should also be appointed to lead the agenda, the Committee recommends.

Going forward, the PASC says it expects to consider the state of the charity sector in a later inquiry, in light of concerns that with more charities delivering public services, there is a danger they become an extension of the state.

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Ian Theodoreson
Chief Finance Officer
Church of England
14 Dec 2011

This isn't the concession it at first seems to be. Many charities are able to provide their services to local authorities via subsidiary companies that are separately registered for VAT. The companies charge the local authority VAT (which it in turn reclaims from the government through the VAT refund scheme so it doesn't bear the VAT cost) and because they provide taxable supplies the subsidiaries are in turn able to recover the VAT on their input costs - but only those relating specifically to that contract.

The point Stephen makes is the important one- it is all the stuff charities do that doesn't fall within eligible contracts where the real burden falls and where there is such a massive leeching of charitable funds going on.

[Reply]

Stephen Lulsley
Independent Commentator and Consultant
14 Dec 2011

While I welcome this recommendation that government "should extend the eligibility for the VAT refund scheme which currently applies for public sector bodies, to charities who deliver public services under a contract with a public sector organisation", why stop there?

There are many charities who do not deliver such contract services. What about all those who are providing international aid? Are they any less worthy of being able to recover their VAT?

Surely, if a body is considered to be worthy of being granted charitable status, then every incentive and support should be offered to enable as much of its resources as possible to be available to its beneficiaries including a full refund of VAT on everything that it spends.

[Reply]

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