08/12/11

By Andrew Holt

The European Commission has published its proposals on the future of VAT system: Towards a simpler, more robust and efficient VAT system tailored to the single market.

This follows the Commission Green Paper issued in December 2010 and the subsequent consultation exercise.

Importantly for charities, in the document the Commission “calls on Member States to make use of the existing options to alleviate the burden of VAT on non-profit making organisations.”

This is both a very clear statement that VAT is a burden for charities and a call to action on Member States.

However, The Charity Tax Group (CTG) is very concerned that the only VAT solution proposed by the Commission is the wider use of targeted refund schemes and the continued reliance on social exemptions.

At the same time, the Commission will be producing proposals that will gradually involve the withdrawal of exemptions – social exemptions included.

CTG was concerned at the lack of attention given in last year’s Green Paper to the problems facing charities.

It has worked extensively with members and colleagues across Europe and put a range of options to the Commission but, although the resulting Communication recognises the strength of concern among charities and shows an increased awareness by the Commission of the issues for the sector, there are no radical proposals on how to deal with the problem.

The Commission also appears to have ignored the potential impact on the sector of its proposed gradual reduction in exemptions and reduced rates.

Unless the targeted compensation scheme that it advocates is introduced (and this would be very much at the individual discretion of the Member States), the VAT burden on the sector could increase significantly.

John Hemming, chairman of Charity Tax Group, said: "I am pleased that the Commission communication recognises the problems for the charity sector and that there is a positive reference to the need for compensation mechanisms for charities; but we remain anxious about many of Commission’s proposals particularly in relation to the gradual withdrawal of exemptions.

"We must take action to ensure that charities are not once again casualties of the change process as the Commission seeks to streamline the VAT system to help businesses.”

CTG on Finance Bill
The CTG has also commented on the draft Finance Bill 2012 clauses which have been published and include a range of charity tax related measures.

After seven years campaigning for its introduction and following detailed negotiations with HM Treasury and HMRC, CTG welcomed the planned implementation of the cost-sharing exemption in the UK.

The government today outlined the legislation that will be introduced in Finance Bill 2012 to implement Article 132(1)(f) of the Principal VAT Directive (PVD) in the UK.

This legislation has the potential to remove a significant VAT barrier for UK charities which try to improve their efficiency and lower costs by sharing services.

The introduction of the exemption is a key success; the challenge now is to ensure that it is implemented in a way that is beneficial to the sector.

The Charity Tax Group lobbied hard for the relaxation of the independence condition, and proposed alternative solutions to HMRC’s insistence on the need to create an independent structure through which services can be shared.

The draft legislation makes clear that “to take advantage of the exemption businesses and organisations are expected to form new cost sharing vehicles” but it unclear what form such a vehicle should take.

The government estimates that the average annual additional administrative costs will be in the range of £350,000 to £550,000.

CTG is seeking clarification from HMRC and HM Treasury to determine the form the cost-sharing vehicle will be required to take and the definition of independent to be taken.

CTG said it will continue to work closely with officials and sector colleagues to ensure the guidance makes implementation of exemption accessible for as many charities as possible.

The CTG said if there is not sufficient flexibility in the legislation and through the guidance many charities will find the additional administrative costs of an independent cost-sharing vehicle as prohibitive as the existing VAT barriers.

As expected, legislation will be introduced in Finance Bill 2012 so that objects may be loaned or given to appropriate institutions including certain charities and accredited museums for safe keeping and to provide public access.

In return, donors will receive a reduction in their UK tax liability based on a percentage of the value of the object they are donating.

The aim of this scheme is to stimulate lifetime giving by encouraging taxpayers to donate pre-eminent objects, or collections of objects, to the nation.

CTG welcomes this new relief and the Government’s commitment to promoting philanthropy through the tax system.

However, it remains to be seen if the annual limits will be high enough to incentivise new donors.

As expected, legislation will be introduced in Finance Bill 2012, to provide for a reduction in the rate of IHT from 40 per cent to 36 per cent where 10 per cent or more of a deceased person's net estate (after deducting IHT exemptions, reliefs and the nil-rate band) is left to charity.

The measure will apply to deaths on or after 6 April 2012.

CTG welcomes the attempt to increase charitable giving and supports the Legacy10 campaign to promote this relief. However, CTG recognises that IHT relief will only be available to the largest earners.

This new incentive will be an event greater success if it is used as a vehicle to promote wider legacy giving.

The CTG remarked on other things to note: such as the in-year repayments of tax to charities and the removal of the SA Donate scheme.

This measure puts on a statutory footing the practice by certain charities of making claims for repayment of tax outside a tax return (excluding Gift Aid).

HMRC makes certain repayments of tax to charitable companies and certain charitable trusts that make a claim to repayment of tax outside a tax return (in-year claims) which should, in strict law, be claimed in a tax return.

The measure was announced at Budget 2011. It will retain the effect of the existing concession.

CTG welcomed the protection of this concession as part of the wider review of ESCs.

On the SA Donate scheme removal: as expected from 6 April 2012, the “SA Donate” scheme – which enables an individual, who makes a self-assessment return, to direct HMRC to make any repayment of tax due for the tax year to a charity – will be removed.

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