VAT recovery by charities - Time for change?

What is the issue?

While there are concessions and some reliefs, VAT is a normally direct cost to charities. This cost arises as charities are unable to recover VAT incurred in respect of their charitable (non-business for VAT purposes) activities.    

This contrasts with local authorities and other specified bodies (e.g. academies) who are able to get full VAT recovery in respect of their non-business activities. Further, government departments can get recovery of VAT incurred in respect of specified contracted out services, unlike charities.  

Should it be fixed?

The charity sector is critical to society and picks up gaps in support from public bodies. The demand on charities is increasing, and there is increasing commentary regarding the decrease in financial support as people struggle with the cost of living crisis. Even corporate supporters are withdrawing or limiting their contributions – e.g. the recent announcement from Amazon Smile that it is cancelling its programme.   

There is perhaps a bigger question – should VAT be a cost to charities? A VAT recovery mechanism could be introduced to remove this cost for charities.

How could this be achieved?

The solution is straightforward – the VAT recovery mechanism for local authorities and specified bodies is well established. Extend this statutory right to charities that are engaged in specified activities. For example -  

  1. Foodbanks
  2. Human and animal welfare
  3. Education
  4. Sport

It is not difficult to understand the importance of these four areas to the wellbeing of society.  

This availability of recovery could be achieved through class eligibility (similar classifications already exist in VAT legislation) or on an individual approval basis. A general approval power could be granted to HMRC or Treasury, which would allow scrutiny and avoid abuse of process.  

It is important that there is no resultant distortion of competition, but this is easily managed, as any recovery would only apply to non-business activities.   

Other issues

Treasury may push back that there are many valuable reliefs for charities – indeed there are. But they are limited. The system is overly complex for charities and there are meaningful penalties for charities who make a mistake. The attendance at VAT education events evidence there is need to for simplification and some relief. Given the UK’s departure from the European Union there is scope to change UK law – ‘take back control’ – seems to be the focus. It would be great if something positive was achieved with these new powers.  

The next step

For further questions please contact Sean Glancy, or your usual UHY adviser.

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