Irrecoverable VAT is costing charities £1.8bn a year, according to research commissioned by the Charity Tax Group.
According to the group, the findings highlight the importance of VAT reliefs and exemptions for the charity sector.
It is calling on the government to introduce a new special charity VAT rate on purchases to go alongside existing reductions, zero rates and other social exemptions.
The research report Charities and VAT: an evaluation found that currently the total tax contribution made by charities amounts to £10.12bn a year and the current VAT reliefs on purchases amount to £0.8bn.
Charities benefit from some important reliefs, but also incur significant irrecoverable VAT,” said Charity Tax Group chair John Hemming.
“There are both opportunities and risks for the sector as we need to protect the reliefs that we currently have and we also need help with the increasing cost of irrecoverable VAT.
“For too long, VAT has been a burden on charitable activity: we have looked at ways to solve the problem and are proposing the introduction of a special VAT rate for charity purchases.
“This would result in significant VAT savings for all charities and free up funds for essential services. This is a clear and practical solution to address this problem and support the valuable work UK charities are doing on behalf of us all.”
The report was compiled by consultancy London Economics. Its associate director Rohit Ladher added: “As charities face unprecedented challenges (not least due to the ongoing COVID-19 crisis) and opportunities (for example with the UK’s departure from the EU), it is important to remind ourselves of the value generated by charities in the UK.
“While charities benefit from certain tax reliefs and exemptions, this study highlights the significant tax burden they continue to face.”
The Charity Tax Group will be submitting its proposal for a special charity VAT rate on purchases to the Treasury Select Committee Inquiry on Tax after Coronavirus.