John Hemming summarises the latest developments in VAT and  tax in Europe.

The last year has seen many developments in Europe relating to VAT and, to a lesser extent, to taxation affecting UK charities. The Charity Tax Group (CTG) has been actively working to ensure that the voice of charities is properly considered by the European Commission and other EU institutions.

Future of VAT

CTG, through its active engagement with the European Charities’ Committee on VAT (Eccvat), has been involved from the outset in the consultation on the Future of VAT. The consultation process has presented an opportunity for charities to seek improvements to the VAT system, but it has also presented a threat to the valuable reliefs and exemptions that are enjoyed under the current system.

In December 2011, the European Commission adopted a Communication outlining its response to a consultation process that had run throughout that year. The Communication outlined three goals to reform the current EU VAT system:

• VAT should be made more transparent and more business-friendly;
• Reduced rates and exemptions should be reviewed; and
• New anti-fraud mechanisms to fight revenue losses should be set up.

Following an extensive campaign by Eccvat, the Communication formally acknowledged that VAT is a real burden for charities (the first time it had done so in such explicit terms), and called upon Member States to make use of the refund mechanisms available to mitigate the position as far as possible. CTG welcomed the recognition of the VAT burden facing charities and the confirmation that there are no obstacles in EU law to grant-based refund schemes outside the VAT system of the kind enjoyed by public bodies, being extended to charities.

However, CTG has called for more uniform application of such schemes by the 27 Member States, as the introduction of such rebate schemes is at their individual discretion, and the adoption of such schemes is hard to achieve at a time of financial austerity in many countries. CTG is also concerned that the Commission appears to have underestimated the potential impact on the sector of its proposed gradual reduction in the social exemptions and reduced rates, in the interests of ‘simplification’, given that both types of relief from the prevailing very high standard rates of VAT are of great value to charities in reducing the overall VAT burden they now suffer.

In May 2012, the Council welcomed the Communication and asked the Commission to progress these recommendations and to work in close co-operation with Member States. This led to the formation of the VAT Expert Group, which was created to establish a dialogue between the Commission and stakeholders on the reform of the VAT system. Eccvat has applied for observer status to the group to ensure that it will be able to contribute to policy discussions on VAT issues affecting charities.

Copenhagen Economics report: VAT treatment of public sector bodies

CTG awaits the outcome of the recent Copenhagen Economics study on the VAT treatment of public sector bodies. The study will include a section on charities and CTG and Eccvat have been in regular contact with Copenhagen Economics and have contributed case studies and other data. CTG is pleased that the Commission has not made any attempt to remove the social exemptions (including for example exemptions relating to welfare services, fundraising, health and education), but this option is likely to be considered by this report (the full taxation model) as well as further options including the extension of targeted rebate schemes to charities. The study had not been published at the time of writing, but judging from the drafts seen, the section on charities appears to be fairly limited in its scope. However, CTG looks forward to the publication of the report and welcomes the expected recognition of the difficult and invidious position of charities in the VAT system and the need to mitigate the problems created by irrecoverable VAT on their essential expenditure to carry out their vital social welfare and other functions. The Commission plans to hold a conference in 2013 to discuss the options for the future VAT treatment of public services, explored in the paper. Eccvat has been invited to participate and outline the impact of proposed reforms on charities, which will provide an important platform for the sector at a meeting of influential stakeholders including MEPs, representatives of the Member States and Commission officials.

Reduced-rates consultation

The Commission has also launched a public consultation on the review of existing legislation on VAT reduced rates. CTG welcomes this and the commitment to reduce red tape and administration costs. The review focuses on reduced rates which are deemed to constitute an obstacle to the proper functioning of the internal market and those on goods and services for which the consumption is discouraged by other EU policies; the review focuses on reduced rates relating to water, energy, waste and housing. While there is no specific reference to charities in the consultation document and the Commission is not understood to be planning to abolish any specific reduced rates at this stage, CTG has continued to stress the importance of certain existing reduced rates for charities and make clear the financial costs and adverse consequences of any future proposals to remove them. It is also important to note that any change resulting from this exercise is likely to be a long way off and would require unanimous agreement of the 27 Member States. In short, it is not an immediate threat; but CTG has registered its concern with HMRC, HM Treasury and, in response to the consultation, with the Commission.

It is important that the consultation states that similar goods and services should be subject to the same VAT rates (ie when a comparable product is available online as a result of technological developments). For example, in the UK, books (which are zero rated) do have an online equivalent: ebooks. Therefore there is a case for the zero rate to be extended to ebooks and emagazines on the basis that they are similar and competing products (or indeed the same). The same case can be made in relation to the discretionary reduced rate available to Member States for books and other printed matter. At the same time as making this suggestion for the future, the Commission has begun infraction proceedings against France and Luxembourg for applying a reduced rate on ebooks. CTG is aware that there is litigation planned which will claim wrongful imposition of VAT on ebooks. While allowing the existing zero rate to accommodate ebooks would be welcome, CTG recognises that this argument would be likely to face strong opposition from HMRC and the Commission. However, CTG is supportive of the proposition that the definition of a book has always included ebooks, and the same applies to emagazines and eperiodicals, it is just that they were not envisaged when the legislation was drafted. CTG believes that this interpretive argument has been properly considered and, based on the principle that the law is ‘always speaking’, has real force and has more chance of success than one based on the principles of equivalence and fiscal neutrality. No change in the rules is likely in near future but, in the longer term, the extension of a reduced VAT rate to the ebooks and similar online publications could be very beneficial for charities.

Other European developments

There have also been a number of non-VAT related policy developments at the European level of which charities need to be aware. This includes the Commission’s controversial proposal to introduce a Financial Transaction Tax (FTT). The proposal, which requires unanimity, was published in September 2011, but failed to be endorsed by the 27 Member States. In order to overcome this deadlock, supportive Member States requested to proceed through the “enhanced co-operation” framework which allows a minimum of nine Member States to move forward when unanimity is required but cannot be reached. The Commission published a proposal for authorising enhanced co-operation on 23 October 2012. The UK has notified that it does not want to take part in enhanced co-operation. However the introduction of an FTT in other EU countries could indirectly affect the UK and the issue remains under scrutiny. CTG continues to watch this issue closely and, while offering no comment on the rights or wrongs of the tax more generally, has sought to highlight that a blanket imposition of an FTT across the board will impact adversely on the activities of charities with investment portfolios in general and of grant making charities in particular.

Earlier this year the Commission published a Communication on State Aid Modernisation which received far less publicity than the FTT proposal, but considers a possible review of the de minimis Regulation which enables government to give support to small undertakings that would otherwise face closure. CTG replied to the Commission’s questionnaire on the de minimis Regulation, reminding the Commission that state funding for charities does not distort either competition or trade between Member States and has a positive effect for the sector and the wider community.

As ever, Europe continues to throw up issues that could affect the sector and CTG will watch developments closely.

John Hemming is chairman of Charity Tax Group and Eccvat