The European Commission has agreed a shake-up of VAT rules which is likely to bring significant change to charity reliefs worth hundreds of millions of pounds.

The Commission has adopted an action plan on VAT called Towards a single EU VAT area which will have wide-ranging implications on VAT, including charity tax rules.

The most significant of the potential changes, according to the Charity Tax Group, is to charity zero rated reliefs.

Current EU rules prescribe a list of goods and services on which governments can charge a zero rate of VAT, and adding new items to this list can be done only with great difficulty. But the new proposals suggest either scrapping this list, or giving governments more freedom to add and remove products and services.

A zero rate of VAT is the most favourable tax treatment. It allows a charity or other business to charge no VAT on products and services offered to customers, but to recoup the VAT it paid itself.

Charities in the UK currently enjoy a number of significant zero rates, including on advertising and the sale of donated goods.

The CTG said that the proposals should be good news for charities, because they can lobby for more services to be zero rated. However there are also concerns that if it becomes easier to add and remove services, government could propose removing a number of longstanding reliefs which charities currently enjoy.

The CTG also said that there had been a proposal on the table to remove zero rates altogether, which would have been extremely bad news for charities. But this is not being taken forward.

John Hemming, chair of CTG (pictured), said: “It is reassuring that the Commission has confirmed that it will not scrap zero or reduced rates, but will instead give more flexibility to Member States on VAT rates, including the option for other countries to use zero rates.  It is crucial that the implications of the reform proposals are scrutinised closely, to identify both risks and opportunities.”