Charities may not benefit from back-office VAT exemption

THE THIRD SECTOR will not be able to make savings as a result of the proposed VAT exemption on shared back-office services, an HM Revenue & Customs official has said.

The exemption was introduced in European law in 1978, but it is only now that there is any demand for it, with public bodies using shared services as a way of making savings. HMRC is currently consulting on its implementation.

However, David Bond, senior policy advisor at HMRC told a meeting of the Charity Finance Directors’ Group this week that the services covered by the exemption would have to be “directly necessary”, civilsociety.co.uk reported. Back-office services that offer the most opportunity for savings, such as payroll, finance and IT, would not be covered under the current legal definition, he said.

There was a possibility that HMRC would look to amend the definition so that all services provided by the charity would be considered directly necessary provided that 85% or more of the organisations’ total activity is non-business related.

The closing date of the consultation is 30 September. CFDG chair Ian Theodoreson urged charity professionals to respond to the consultation to ensure a workable charity exemption is included.

An HMRC spokesman said: “No decisions on how to proceed have been made, nor will they until after the formal consultation period has ended and the responses have been considered.

“The VAT Cost Sharing Exemption allows organisations engaged in exempt and/or non-business activities, which includes charities, the education sector and housing associations to use the exemption in relation to services they receive that are ‘directly necessary’ to their exempt and/or non-business activity.”