There are calls for the government to introduce a new special charity VAT rate on purchases, after a study found charities miss out on almost £2bn a year on irrecoverable VAT
The research identified that when charities purchase goods and services they pay around £3.1bn in input VAT a year, of which £1.8bn (57%) is irrecoverable.
VAT reliefs on purchases by charities are estimated to be worth £800m for the charity sector as a whole.
The Charity Tax Group (CTG), which commissioned the research from London Economics, said there had previously been no comprehensive figures for the amount of VAT relief charities claim, nor the ability to evaluate effectively the impact on charities of changes to the VAT system.
The survey indicated that just over half of the reliefs are applied to high-value infrastructure/capital expenditure such as ambulances, adapted vehicles for people with disabilities, construction of buildings qualifying for zero rate relief and lifeboats.
CTG said that while these reliefs provide a significant long-term benefit for those charities that incur such expenditure, the majority of charity spending is on to day-to-day running costs that do not benefit from similar VAT relief.
The research also quantified, for the first time, the output VAT charged on supplies of goods and services by charities, which amounts to £1.7bn annually.
The report said there is strong evidence to suggest that because charities are providing services to people who cannot recover the VAT charged and are often those who are least able to pay, charities subsidise the true cost of providing the services by absorbing the VAT instead of adding it – thereby increasing the overall VAT burden on the sector.
The total tax contribution made by charities is put at £10.12bn a year.
The CTG argues that there are underlying structural distortions in the VAT system that adversely affect charities, and says that with the Office of Tax Simplification calling for a review of UK VAT rates, reliefs and exemptions and the House of Commons Treasury select committee reviewing the scope and effectiveness of tax reliefs after Covid-19, now is the moment to address this.
The group’s recommendation is for the government to introduce a new special charity VAT rate on purchases, to complement existing reduced and zero rates and the social exemption, which it says is simple, benefits all charities, and could be adjusted depending on economic circumstances.
John Hemming, CTG chairman, said: ‘For too long, VAT has been a burden on charitable activity: we have looked at ways to solve the problem and are proposing the introduction of a special VAT rate for charity purchases.
‘This would result in significant VAT savings for all charities and free up funds for essential services. This is a clear and practical solution to address this problem and support the valuable work UK charities are doing on behalf of us all.’
The CTG pointed out that during the current pandemic, charity fundraising and sales efforts have been hit just at the moment when demand for services has increased.
Andy Haldane, chief economist at the Bank of England, reported in November that ‘around three quarters of charities have experienced a rise in demand for their services with a third having seen demand increase by over 25%.’
A November survey by Pro Bono Economics showed over 80% of charities expected their income to decline over the next year, with around a third expecting a decline of 25% or more, largely from earned and fundraising sources, and put the funding gap for the sector this year at around £10bn.
Rohit Ladher, associate director, London Economics, said: ‘As charities face unprecedented challenges (not least due to the ongoing Covid-19 crisis) and opportunities (for example with the UK’s departure from the EU), it is important to remind ourselves of the value generated by charities in the UK.
‘While charities benefit from certain tax reliefs and exemptions, this study highlights the significant tax burden they continue to face.’
CTG says it will be submitting its proposal to the Treasury select committee inquiry on tax after coronavirus and as part of its next Budget submission.