Charities Wait In Hope For A Chance To Claim Back VAT

Six-year-old Molly Southern and her mother, Debbie, need all the help they can get. Molly is terminally ill: severely brain-damaged, epileptic and physically disabled, and she rarely sleeps at night.

Four times a year, the Southerns spend a few nights at Demelza House Children’s Hospice, a bright and modern £3.5m unit in Sittingbourne, Kent. There Molly receives nursing through the night. It gives the whole family a much-needed chance to unwind.

‘It’s fantastic,’ says Debbie. ‘Molly loves it. It means we get a night’s sleep and the care is just great.’

Demelza opened in 1998. Housing eight children at any one time, its impressive facilities include an art room, music facilities, soft play, water therapy, a computer room for teenagers, family sleepover space and a multi-faith funeral wing. Bereavement counselling and practical support for families are all part of the service. It claims to be the only children’s hospice in Kent, East Sussex and south London offering this complete package.

And it is expanding. Within weeks, a new facility in Eltham, south London, will open, costing £3m. It also has dedicated nurses attached to a south London hospital.

Half of Demelza’s £6.5m income comes from voluntary contributions. They include the proceeds of a Damien Hirst picture sold for £100,000 at his Sotheby’s auction earlier this year. Just over £1.25m comes from social services and NHS commissions.

Demelza is typical of most UK charities. Invited by government to fill a ‘care service vacuum’, it is more than capable of meeting the need but is financially fragile.

Like the Southerns, Demelza needs all the help it can get. But, alarmingly, it is faced with a tax regime that does not allow it to claim back VAT on any purchases or services it buys – unlike ordinary businesses and local authorities.

When Demelza built its new £3m south London hospice, all of the building costs incurred 17.5 per cent VAT. Robert Tolson, the charity’s finance and operations director, says that Demelza ends up forking out £100,000 each year for this reason. ‘That’s enough to employ several nurses. It is a real concern for us because there is so much more we can do.’

For Demelza, read the entire charitable sector. Despite the recent 2.5 per cent reduction in VAT, campaigners at the Charity Tax Group estimate that Britain’s voluntary organisations, from those caring for the disabled to medical research organisations and even community village halls, pay nearly £500m in VAT they cannot claim back.

‘It’s not a level playing field and that’s something we have never been able to understand,’ says Helen Donoghue, director of the Charity Tax Group. ‘This hits the charities that do something rather than sit on cash. It is utterly perverse and illogical.’

The problem is not new. It dates back three decades to when VAT almost doubled under Margaret Thatcher. But the recession has placed charities in a vulnerable position: donations have plunged and a growing number are hit by serious pension deficits.

Consequently many are on the verge of collapse, including some high-profile children’s charities. This at a time when their services – especially those for the unemployed and those with marital difficulties, psychological disorders, drink and drug problems – are seeing surging demand.

Charities do have tax advantages. They do not pay tax on profits, though most do not make money. In addition they get special treatment on business rates and are billed less for energy.

They also benefit from Gift Aid, which allows donations to be made as if the tax had been deducted, with the Inland Revenue distributing the assumed tax back to the good cause. But up to £700m in Gift Aid allowances lies unclaimed, according to estimates.

Donoghue at the Charity Tax Group says: ‘The Danish government introduced a refund two years ago. Canada gives a 50 per cent refund. New Zealand gives a refund. The question is: is the UK government prepared to do it?’

Next month the Cabinet Office will publish an action plan to help the so-called ‘third sector’ cope with the recession. Stephen Bubb, the chief executive of the Association of Chief Executives of Voluntary Organisations, wants ‘VAT recovery’ to be a centrepiece of the plan.

He says: ‘There’s a lot of money that ought to come back to charities that simply does not. In a recession we need that money back. VAT recovery ought to be at the forefront of the government’s plan. We have not had an encouraging response but we will continue to raise this.’

Before Labour was elected it told the charitable sector – which these days employs more people than agriculture – that it would remove the barriers to allow this to happen. After winning power in 1997, it launched a tax review and there was hope Labour would act on its pledge. It has failed to do so. Next month seems like a good opportunity to make good on its pledge.
The problem

Businesses and public bodies have to pay VAT on goods and services they purchase, but can then recover it from the Treasury. This leaves consumers and charities alone in picking up the tab.

Charities do not pay VAT on fundraising activities, but do on all other goods and services. There are some exemptions: the purchase of lifeboats is zero-rated, as are memorials.

The Treasury says tax relief and exemptions for charities are worth around £3bn and the existing relief for VAT on purchases is worth £200m. A spokesman said: ‘The Treasury examined the concerns charities have with VAT. It is not possible to find a solution that is affordable, well-targeted and based on principle.’