Charity Tax Group has hailed a new report published by the European Commission on the different VAT treatments in different EU member states, as a major milestone in its campaign to secure a fairer VAT regime for UK charities.

The report, written by consultants Copenhagen Economics, is titled VAT in the public sector and exemptions in the public interest.  CTG, which has been working with other charities across Europe to highlight the inconsistencies in various VAT regulations, said the study “clearly demonstrates the problems that charities experience with the current VAT system”.

Copenhagen Economics examined the eight refund schemes in place in the EU member states that allow public bodies to recover input VAT when outsourcing support services.

CTG’s director Helen Donoghue said the study found that the present treatment of public bodies has “distortive effects in relation to the economic decisions they take, in particularly about outsourcing and competition with the private sector”.

Although the report recommends moving to a full taxation model – a solution that CTG feels is too politically contentious to be realistic – it also agrees that refund schemes could be extended throughout the EU and, crucially, argues that any refunds should apply not only to taxpayer-funded bodies, but also to charities that replace or supplement state provision of public services.

Donoghue said: “The study raises very important issues for the future treatment of public bodies and charities in the EU and its findings need to be carefully analysed and weighed before any decisions are reached.

“But it clearly demonstrates that the present system is unsatisfactory and causes serious distortions, not least in the area of outsourcing from public bodies to charities where the VAT system causes severe problems at present.”

She said the report’s conclusion that a refund scheme should be open to those organisations that provide public benefit that is funded by the taxpayer, as in the Canadian model, is “very welcome”.

“We strongly hope the universal refund scheme option will be considered positively.”

The European Commission will now consider the report alongside responses to its green paper on VAT, which is out for consultation until the end of May.