Increase in VAT could cost charities up to £100 million per year

The Charity Finance Directors’ Group has urged the Chancellor of the Exchequer, Gordon Brown MP, not to increase VAT or National Insurance in the forthcoming Budget. There have been some rumours that Mr Brown was
considering raising VAT to 20% or increasing National Insurance.

Using the different estimates of the current cost of irrecoverable VAT on charities, a rise in VAT to 20% could cost the sector up to £100 million per year. Any increase in National Insurance would also impact heavily on the
charity sector. The estimated charity sector payroll is around £5 billion so a one per cent increase in employers NI could cost about £50 million.

NCVO (National Council for Voluntary Organisations) have recently estimated current cost of irrecoverable VAT to charities of about £400 million. However, Russell Moore of Saffery Champness, a leading VAT advisor to the voluntary sector in one of the top twenty accountancy practices in the United Kingdom, argues that “the figure of £400 million is a very conservative estimate and our best estimation of the cost of irrecoverable VAT to charities may in fact be closer to £1 billion per year. Many charities do not post irrecoverable VAT so they are not able to say how much
they lose and the original estimates did not include the millions lost on expenditure relating to exempt activities”.

CFDG Vice Chair (and Finance Director at the World Wide Fund for Nature), Les Jones OBE, said today: “Any proposal to increase VAT or National Insurance would have a massive impact on the ability of charities to achieve their social and charitable goals. We would be very disappointed if the
Government sought to raise funds in this way without giving any relief to the charity sector. “

CFDG Director, Shirley Scott stated “Since 1979 there has been a major shift from direct to indirect taxation which has cost the charity sector dearly. In that time, The Treasury has increased standard rate VAT from 8.5% to 17.5% and the basic rate of income tax has come down from 33% to 22%. As income tax reduces, the sums rebated to charities reduce; charities are subject to indirect tax rises and the shortfall is compounded. Any increase in VAT or National Insurance rates would negate the benefit from the tax efficient giving schemes promoted in the 2000 Budget.”

Notes:

1. Currently all charities are able to buy certain goods and services without paying VAT, providing these services fulfil their charitable objectives. Some charities can buy specific goods without paying VAT.
Particular charities can also provide services that are zero rated, which means that VAT is not chargable to the consumer and that the charity can reclaim VAT costs incurred in providing the services.

2. The provision of supplies – for example, welfare services – is exempt from VAT. This means that charities themselves do not charge VAT but also that they cannot reclaim VAT on any goods or services they buy in order
to make the supply. Unlike local authorities, charities are not reimbursed by Government for the VAT they pay. Under provisions of Section 33 of the VAT Act 1994, local authorities, the BBC and even ITN enjoy compensation for
irrecoverable VAT.

3. The Charity Finance Directors’ Group was set up in 1987 and is an umbrella group that specialises in helping charities to manage their finance-related functions.

4. CFDG’s 850 plus members are responsible for the finances of charities with a wide variety of income levels. Over 60% of the top 500 charities are members of the CFDG. Between them our members manage some £10 Billion in charity income per year.

5. The CFDG is the sector representative on many committees and working parties established by professional accounting bodies and government departments, including the SORP Review Committee.