27 July 2018
The Government has recently announced an initiative which is seeking to coordinate and improve the contribution of charities to UK society. This was referred to in our blog - how public sector bodies interact with the charity sector.
The idea is reminiscent of the previous 'big society' idea. The announcement was clear that no new money would be made available – this is about improving coordination, enabling delivery and improving communication.
There is no additional funding but could the tax system be made to work better to facilitate delivery by reducing costs? There are better tax treatments for local authorities delivering valuable services than a charity delivering exactly the same services. With the increasing pressures on local authorities funding more services are likely to be delivered by charities, so is this an opportunity to join up the tax system too.
How it works now
In order to understand how this could be improved, it is necessary to understand the different treatments that apply. The issue is generally with VAT being at 20%, which can produce a significant and prohibitive cost. It is far removed from the ‘luxury tax’ it was first presented as.
For charities, there are some reliefs which mean that VAT is not incurred – but these are very limited in scope and frequently challenged by HMRC (particularly in respect of construction projects). Local authorities and some other specified bodies, for example, academies and museums, enjoy full VAT recovery where they undertake non-business activities. Government departments (including the NHS) enjoy some recovery on specified contracted out services, which encourages them to use third parties for the delivery of these services.
Can it work better?
‘Playing’ with these refund mechanisms has been done before and produced significant savings, facilitating social policy work.
For example, in the 2000s, local authority housing stock needed significant refurbishment. In order to achieve this, housing stock was transferred to housing associations who could raise the necessary finance to undertake the refurbishments and better manage the housing for local residents.
However, in order to remove the £ billion VAT cost of the refurbishments, these were commissioned by the local authority prior to transfer – because they could recover the VAT incurred. This took the VAT out of the cost, with new fit-for-purpose housing created and the economics of the transaction now working.
There are other partnership arrangements where the lead body is the local authority. Again this results in full VAT recovery. It is a meaningful saving and results in the money provided being used for the charitable (or good works) objective and not diluted by a (not insignificant) contribution to the treasury.
So what do we do?
The initiative can only be a good thing, providing better communication and better delivery. But this is without more funding - there could be and it would be an invisible cost for the treasury. So if you enter into new arrangements, take some time to think about the partners and whether it can be made to work better. If charities will be providing services which are traditionally provided by local authorities, this is likely to produce inequality of treatment. The fundamental principle of the initiative is partnership and that presents an opportunity for mitigation. The delivery model needs to be considered and agreed, and if it is properly managed, could reduce or remove the VAT cost, or in other words, produce a 20% saving.
If you would like to discuss this or any other matter affecting your charity, please contact your local UHY charity specialist. Alternatively, if you would like to read more charity-focused blogs please click here.
