The structure to exempt charities from paying VAT on shared back-office services that is being considered by the Treasury is “limited” and “will fall short of that needed by many organisations in the sector”, PricewaterhouseCoopers has warned.

It says the Treasury plans to place strict limitations upon the types of services that might benefit from the exemption, and has spoken about creating a condition that services must be “demonstrably directly linked to an exempt or non-taxable activity”.

If this were the case, charities might struggle to argue that back office services of any organisation have this direct link as such services don’t tend to be linked to specific activities under current partial exemption methods.

Writing in a technical briefing for Charity Finance, PwC senior manager Keith Lawson said: “If back office services are to be excluded from exemption this could limit the scope of benefits and would damage, perhaps beyond repair, many shared-service models that are currently being considered.”

He added that while the exemption is loosely based on European legislation, the inclusion of this condition is unique.

“In our view the wording of the European exemption does not seem to support the Treasury’s current interpretation and this could be an area where it will be challenged both before and possibly after the introduction of legislation.”

Consultation delayed

Meanwhile, the consultation on the subject has been delayed and will now not appear until this summer at the earliest, Treasury officials have indicated.

Originally expected last Autumn, the delay means legislation is unlikely to be presented to Parliament before 2012, according to Lawson.