Charities reeling as VAT concession is cut

The taxman is set to come under intense pressure from charity groups following the removal of a VAT concession, which tax advisers predict will have a 'devastating' impact on the sector.

A body representing the finance directors of leading charities has already declared its intention to lobby for the reinstatement of the concession.

Currently charities pay no VAT on the acquisition or construction of a new building if it is 90% used for charitable purposes.

HMRC is saying from 1 January 2010, that will rise to 95%, potentially ruling out large numbers of charities from the VAT saving.

Experts complained that the change has come with no warning and with no consultation. Charity staff warned of the cost implications for the not-for-profit sector.

Keith Hickey, chief executive of the Charity Finance Director's Group, said charities have reason to be concerned, and that his organisation would lobby the government to reverse the change. 'The situation will now only become worse. We're confused as to why HMRC should have changed their interpretation of 'solely' charitable use from 90% to 95%,' he said.

'This action does not suggest a government that is putting charities at the heart of its thinking. Given the complete lack of consultation and the speed with which this change was introduced, we have to believe that this will be a significant cost to the sector,' Hickey added.

Steve Hodgetts, VAT partner at Baker Tilly, said last week's announcement was the first the profession knew of the plan and comes at a time when charities are already struggling with low rates of donations.

'It was a big surprise in the current climate for HMRC to take this concession away. It will have a huge impact on charities and further education providers,' he said.

Hodgetts estimates the move will cost hundreds of thousands of pounds in additional VAT to Baker Tilly clients alone.

Kevin Barnes, director of finance at BarnardoÕs, said the policy change will inevitably have widespread financial implications for charity org-

anisations and describes it as a 'cause for concern'.

Marc Welby, VAT partner at BDO Stoy Hayward, said he is surprised there was no formal consultation on the change, particularly as 'there will inevitably be some casualties.'

According to a spokesman for HMRC, the concession was specifically reviewed by the department in 2007 and he conceded no formal consultation was entered into with the charity sector.

The spokesman said HMRC doesn't anticipate any tax to be generated from the removal of the concession, and expects most - if not all, charities who previously qualified for the 0% rate, to continue to benefit under the revised rules.

Further Reading:

Charity tax research called into question