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, Charity Tax Group, commented:

“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.”

New research on the impact of VAT on charities

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.

CTG’s report, Charities and VAT: an evaluation, calls for VAT reform for charities in response to new research from London Economics: The value of VAT reliefs for the charity sector.  The 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, London Economics, said:

“London Economics is pleased to have undertaken this important research study commissioned by the Charity Tax Group. 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.”

Notes to Editors

Embargoed until the report is launched on Thursday 3 December at 16.00 to an audience of over 150 charities and professional advisers (the page will remain private until that point). All interested parties are invited to join the launch using this Zoom link and the passcode 664405,

CTG will be submitting this proposal to the Treasury Select Committee Inquiry on Tax after Coronavirus and as part of its next Budget Submission.

This research was made possible by generous grants from the City Bridget Trust and Paul Hamlyn Foundation for which CTG is very grateful.

The Charity Tax Group (CTG) has over 800 members of all sizes representing all types of charitable activity. It was set up in 1982 to make representations to Government on charity taxation and it has since become the leading voice for the sector on this issue. CTG is an active participant in HMRC’s Charity Tax Forum and sits as the charity representative on HMRC’s Joint VAT Consultative Committee (JVCC). For more information or additional press comment, please contact the CTG Secretariat at info@charitytaxgroup.org.uk or 02072221265.

A JPEG of the title Charities and VAT: an evaluation can be downloaded here.