A call has been made for the government to introduce a new special charity VAT rate on purchases

Charities lose billions of pounds a year in VAT, a new study has shown.

New research commissioned by the Charity Tax Group (CTG) and undertaken by London Economics shows that VAT continues to place a significant burden on UK charities, with irrecoverable VAT now costing charities £1.8bn a year. The research also highlights the importance of existing VAT reliefs and exemptions for the charity sector, against a backdrop of calls for a widening of the VAT base both in response to Brexit and to pay for the cost of the Covid-19 pandemic.

To tackle the increasing VAT burden, CTG is calling on the government to introduce a new special charity VAT rate on purchases, to complement existing reduced and zero rates and the social exemptions. The proposal is simple, benefits all charities, and could be adjusted depending on economic circumstances.

• Charities and VAT: an evaluation, Charity Tax Group, December 2020
• The value of VAT reliefs for the charity sector, London Economics, November 2020

Launching the research, John Hemming, chairman of the Charity Tax Group, said: “The research is very timely: there are various reviews underway looking at how VAT should operate after Brexit. Charities benefit from some important reliefs, but also incur significant irrecoverable VAT. 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.”

VAT is a problem because charities cannot always pass on the cost of VAT to customers and which means they cannot recover the VAT on their purchases in full. Charity funds have to be used to pay VAT bills, rather than being used to help beneficiaries.

The new research quantifies for the first time the value of existing VAT reliefs on purchases (£0.8bn) and the impact of VAT on charity sales and service delivery. Until now, there have been no comprehensive figures for the amount of VAT relief charities claim, nor the ability to evaluate effectively the impact on charities of changes to the VAT system. The research also demonstrates, for the first time, the total tax contribution made by charities (TTC) which amounts to £10.12bn a year and quantifies the reliefs available to them. 

Rohit Ladher, associate director of London Economics, said: “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.”