It is said that “charity begins at home”. It is also said “look after the pennies and the pounds look after themselves”. Maybe this has been updated for cents and euros I’m not sure but as part of the recent Budget documentation, a report on the VAT cost for charities was released by the Department of Finance. Its main findings and representations were put forward by the Irish charities Tax Reform Group, a working group formed to examine proposals of reducing the VAT burden on charities in Ireland.
While many charities have charitable exemption status for tax purposes, whereby transactions relating to lands and buildings in the State are not subject to Capital Gains Tax or Stamp Duty, Corporate Tax is not due on any rents received and Local Property Tax does not apply to residential property for special needs accommodation; this Charitable status does not extend to VAT.
For VAT purposes, charities have to look at their total activities to assess whether any income is potentially subject to VAT. While it’s the Revenue’s view that most charities should be considered as operating outside the scope of VAT and therefore are neither obliged nor entitled to register for VAT, this is only from a sales VAT point of view. In terms of purchases however, charities are similar to private individuals, in that they incur VAT on costs depending on whether the suppliers are VAT registered or not; this has nothing to do with the VAT status of the charities themselves. As a result, charities incur VAT on the purchase of consumables, the rental of premises, professional service fees etc. Once the VAT is suffered, there is limited potential to recover this VAT so the VAT cost for a Charity can effectively increase ongoing operating costs by 13.5% (light and heat ) or 23% (rents, professional fees etc ).
While there are some ring fenced repayment schemes in place that may apply to charities, these are mainly aimed at multiple persons. Examples include VAT Refund Orders for VAT incurred on the purchase and adaptation of certain vehicles, radios for use by blind persons, certain aids purchased by or on behalf of a disabled person, certain small rescue crafts and ancillary equipment, goods purchased for exportation by philanthropic organisations for humanitarian, charitable or teaching activities abroad, certain new medical instruments and appliances purchased by a hospital solely with voluntary donations, the purchase or importation of certain new instruments through voluntary donations by a research institution, university or school engaged in medical research.
So as you can see there is no blanket VAT refund mechanism for charities. Why is this? On the one hand, one of the main principals behind the operation of VAT is that VAT on purchases should only to be recovered by those who intend to charge VAT on sales. On the other hand, the EU Commissioner gave a VAT refund scheme for charities a blessing in 2005 when he stated 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”. It is therefore hard to see why the various EU countries have not been more proactive in introducing such a compensation scheme, especially in recent years when times were tough and donating to others was less possible.
Across the 28 Member States, only the UK, Denmark and the Netherlands have a VAT refund scheme for charities. As these three countries have different schemes in place, the Minister for Finance is now challenged with putting a VAT refund scheme in place for Ireland which is as good as the best. With this in mind, the Minister will need to look at the amount of VAT suffered by Irish charities and the amount of income raised by such charities through public fundraising and State funding. Based on a report provided by the Irish charities Tax Reform Group, total expenditure incurred by charities in 2010 was €1.7 billion with VAT taking up €77.4m of that cost. This equated to 4.5% of total spend. On the income side, while 59% of total income for charities in 2010 was from fundraised income, charities have suffered an average 20% reduction in publically fundraised income between the years 2008 and 2013 with some charities experiencing up to 35% reduction in such funding. This has obviously led to tighter budgets, job losses and reduced services.
However, it shouldn’t go unmentioned that State support is also an important source of income for charities. So why currently waste charity budget spend on irrecoverable VAT suffered by charities which is to be remitted by various suppliers to the Exchequer? Wouldn’t it be better to move towards change? But one can only imagine the debate. How to manage a targeted refund scheme for charities while having no similar refund scheme for other organisations? Why should charities qualify for a refund while other not-for-profit organisations are also struggling? How will charities qualify for the refund? Should it include all charities or only registered charities for the tax exemption? Should charities receive a full refund or a partial refund of VAT incurred? If only partial refunds are to be processed, should they be based on overall budget or level of fundraising? Should there be a minimum VAT spend in order for a refund to apply? Should the refund relate to specific spend only? How much will the refund scheme cost the Exchequer? Should there be a maximum budget for VAT refunds to charities? Should the refund be extended to local Community sporting clubs? Will this refund scheme prompt submissions by other sectors?
All debate aside, current opinion polls show that our trust in charities is growing again and fundraising is back on the increase, so wouldn’t it be nice to know as you throw your coppers into the buckets on Shop Street that more of it reaches the bottom?
Dorothy Gallagher is a dedicated VAT specialist who works mainly on property transactions, Revenue audits and bespoke refund VAT projects.