A Newham homelessness charity has said its services are under threat after receiving an unexpected £1m tax bill from HM Revenue & Customs.
Caritas Anchor House, which provides accommodation for hundreds of homeless people, said it received a £1m VAT bill on a new development to provide "move-on flats" to homeless people.
It said the bill - three times more than expected - was because it provided an “accurate” description of the development.
The additional VAT was incurred after HMRC reviewed Caritas Anchor House’s description of services and determined that its definition as a "residential and life skills centre" rather than a "homeless hostel" left it subject to VAT despite no change in the organisation’s services, the charity said.
The charity now says it is being “penalised for positively and accurately describing its work”, having previously been given advice that its VAT bill for the development would be £250,000.
A spokesman for Caritas Anchor House said the charity fears the full cost of HMRC’s action could rise to £1.5m including costs incurred to halt the development and challenge HMRC’s decision.
Yesterday the charity informed its 230 homeless beneficiaries that services may be put at risk.
Keith Furnett, chief executive of Caritas Anchor House, said: “HMRC’s application of VAT in this case is devastating to our work and to the vulnerable people we support. We believe we’re being unreasonably penalised for accurately describing our operations despite not changing what we do.
“What makes this situation even worse is that we have worked incredibly hard to deliver a level of service with a reliance on donations and relatively little government funding.
"We hope HMRC will reverse its decision, and allow us to continue making a huge difference to people’s lives. Otherwise our work is at risk, and local authority services will be put under greater pressure.”
The charity said the unexpected cost “will force it to mothball the development project” and place “substantial pressure” on its services and funds.
A spokesman for HMRC told Civil Society News: “We don’t comment on identifiable taxpayers."
"VAT status is a matter of law, determined by the nature and activities of the individual organisation. Although the tax payable in law has to be paid, we will always provide practical support and advice when approached," he said.
"Time to pay arrangements are available for those with payment problems and anyone in this position should talk to us as soon as they can so we can do everything possible to help."
Caritas Anchor House has appealed to the government to reverse the decision.