The increase in the standard rate of VAT from 17.5% to 20% from 4 January 2011 will increase the irrecoverable tax burden of charities by at least £150 million per year, warns the Charity Tax Group (CTG).

At a time when charities are being asked to do more as part of the Big Society initiative to supplement and replace provision of social welfare and other services by the State, this will be wholly counter-productive as it will directly impede their vital work, warned the CTG.

“We fully understand the Government’s urgent need to tackle the deficit through spending cuts and tax increases,” said Helen Donoghue of the CTG.

Donoghue added: “But it has also emphasised the need for fairness and protection for the least well off and, as our research has shown, the impact of this VAT increase will have a detrimental and disproportionate effect on the charity sector."

“We are therefore strongly urging the case for special protection for charities against this increased burden through a limited rebate scheme. This would refund by matching grant the extra VAT incurred where it relates to their essential non-business expenditure.”

There has been much speculation about an increase in the standard rate of VAT, possibly to 20%.

CTG has been reviewing its previous research on the impact of irrecoverable VAT on charities and the likely impact of an increase on charities:

• Figures for the last available financial year were obtained from 87 charities: For those 87 charities, the total irrecoverable VAT was £142,860,700 (if the VAT rate had been 17.5% throughout the relevant period the equivalent VAT amount would have been £153.8 million)

• Extrapolated to the whole sector, this evidence would suggest an estimate for the total irrecoverable VAT amount of £1.04 billion - £1.3 billion (includes both non-business and exempt business irrecoverable VAT)

• An increase of the standard rate to 19% would cost the sector an additional £86 million

• An increase to 20% would cost the sector an additional £143 million

• Smaller charities (income < £30 million) suffer disproportionately with VAT accounting for 3.6% of income available for charitable expenditure. For charities with an income over £30 million the proportion is 2.3%. VAT rate increases would widen this disparity to 4.4% versus 2.8% respectively.

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