TaxCorporate TaxThe big issue for charities

The big issue for charities

In March 1999, the government announced a major review of charity taxation. The review led to major and much-welcomed changes to promote charitable giving.

However, the review failed to address what was (and is) probably the most important tax issue effecting charities, that is, the thorny issue of irrecoverable VAT and its impact.

It is estimated charities now lose between £400m and £1bn per year due to irrecoverable VAT. It is against the meaning of ‘charity’ for our members to charge for every thing they do, but they have to pay VAT to their own suppliers and cannot recover that cost.

When the chancellor stood up last Wednesday, we had hopes that we would see some measures which would reduce the impact of VAT on charities. We did see some, much welcome technical changes but the big issue of the overall impact of VAT was again not addressed.

The Charity Finance Directors’ Group welcomed the announcement of future fiscal and other incentives to promote volunteering; the fact that donors can backdate their gift aid tax claims to the previous year; and the small concessions on VAT rules and administration.

We also welcomed those initiatives to help small businesses which will also benefit small charities and trading subsidiaries of charities.

However, these positive measures were undermined not just by the failure to address the major issue of VAT, but also by the chancellor’s decision to increase national insurance from April next year.

This move alone will add about £50m extra to the sector’s staff costs and will have an effect on charitable work ranging from hospice care to education and care of the elderly.

The charity sector plays an important role in providing services for the NHS and it just seems counterproductive to tax wages in organisations which are helping improve the health service.

We were also disappointed that the chancellor did not choose to extend the 10% government top up on payroll giving, and that there was nothing to encourage corporate involvement in charities.

The charity sector provides a vital part in improving public services.

The treasury is currently conducting a cross cutting review into the role of the voluntary sector in service provision.

This review must address some of the tough issues such as VAT if it is to ensure that charities can play an active part in public service provision.

  • Shirley Scott is the chief executive of the Charity Finance Directors’ Group.

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