Indirect Tax

Reducing the tax burden on the sector (Indirect Taxation) - Relief of irrecoverable VAT

Although some charities receive significant government funding, they suffer a substantial VAT burden which cannot currently be reclaimed. This means that charities pay up to 21.5% more for goods and services than the commercial sector, as the VAT already paid cannot be recovered. Campaigning to have this situation changed is a real priority for the ICTRG.

If some/all of the VAT burden currently borne by charities could be recouped, it would release substantial funds towards their core work – services to homeless people, children, older people, disabled people, medical research, advocacy etc.

In 2005, Concern’s VAT bill came to 1.5m, while their entire programme in Rwanda cost €1.4m. So, in real terms, twice as many poverty stricken people could have been helped, were it not for the crippling effect of VAT.

The government claims that it is precluded by E.U. VAT law from changing this position, but our research shows that it is possible to introduce a VAT compensation scheme for charities without having to change EU VAT law. This has been confirmed by the EU Commissioner responsible (Mr. Lazlo Kovacs) and his predecessor (Mr. Frits Bolkestein) and demonstrated by Denmark which introduced a VAT compensation scheme for charities in 2007.

The Vat burden on Irish Charities

In 2002, our sister organisation, ICTR Ltd commissioned Ernst & Young to research the extent of the VAT burden on Irish charities. The study found that:

  • The sampled charities paid out a total of €18m on VAT of which €9.4m was paid out of fundraised income.
  • The government can introduce a grant scheme to compensate charities for the VAT they pay without contravening E.U. law.
  • The actual cost to the Exchequer of introducing a refund mechanism is 52% of the total VAT bill since the remainder is paid for from public funding – in the case of the sampled charities, a VAT refund would cost the Exchequer €9.4m.
  • Based on the research it is estimated that at today’s values the cost of introducing a VAT compensation scheme for Irish Charities would be a maximum of €25million.

The EU Commission on Vat

What the EU Commission says: In 2005, EU Commissioner for Taxation and Customs, Mr Laszlo Kovacs stated: “The Commission has always considered that any scheme designed to relieve the VAT burden for charitable activities can be regarded as compatible with EU legislation if it is clearly separated from the VAT system (since under this system VAT can only be refunded if it is connected with taxable supplies) and does not affect the own resources of the Community. The essential difference is that, under such a scheme the tax is collected in the first place and then the Government chooses to allocate it back to the bodies from which it has been collected. This is a subtle but important distinction. “I have to underline that the decision to set up such a refund mechanism is strictly a national budgetary issue over which the Commission has no say or influence.”

Following a meeting between the Irish Charities Tax Reform Group and the previous EU Commissioner, Frits Bolkestein, in Feb. 2003, the Commissioner wrote to ICTRG stating: “During that meeting, the question of the Commission's attitude to a possible scheme whereby the Irish Government would give a subsidy to Irish charities of an amount equivalent to the non-deductible VAT that they had incurred was raised. In particular, the delegation was concerned to know whether any such scheme would be at odds with the provisions of Community VAT law as contained in the 6th VAT Directive. “I wish to confirm to you that in the Commission's view, the granting of government subsidies - irrespective of the beneficiaries - is in itself not contrary to European Union VAT law. In this regard, it has also to be noted that, provided that the State Aid rules are observed. Community law in general does not prescribe how Member States should spend their revenue.”

In its Finance Bill published on the 7th November 2006 the Danish Government made provision for a VAT compensation scheme for charities. The details of how the scheme would operate were published by the Danish government in June 2007. Danish charities are compensated for VAT in direct proportion to the amount of their fundraised income in excess of that raised in the threshold year of 2004.

Where we are going

The ICTRG continues to work at both national and E.U. level to achieve a solution to reduce the VAT burden for Irish charities.

How you can help

Become a member of ICTRG and support our advocacy campaign to have a VAT compensation scheme, similar to the Danish model, introduced in Ireland. Adapt your financial reporting system to capture the amount of VAT your charity pays and let us know both the financial and human cost to your organisation.