Compensating charities for the costs of irrecoverable VAT
Within the VAT system, it is not possible for charities to recover the VAT incurred on goods and services purchased to support non-business activities.
However, EU Commissioners have indicated that EU law does not prevent national governments from compensating charities for irrecoverable VAT:
- Commission’s Communication COM (2011) 851 final: “Member States can also introduce targeted compensation mechanisms, outside the VAT system, to alleviate the cost of VAT on their acquisitions.” “The Commission calls on Member States to make use of the existing options to alleviate the burden of VAT on non-profit making organisations. It can provide them with guidance on the VAT regime applicable to them” (p10).
- National refund schemes are outside the scope of the EU VAT system
ECCVAT is encouraging Member States to develop VAT refund/compensation schemes for charities. VAT refund schemes exist but are mainly targeted at public bodies. However, some countries (Denmark, Ireland, the UK) have set up national refund schemes for charities: this sets important precedents by recognising the obstacles that VAT presents to charities and illustrates the potential for similar schemes in other Member States.
Examples of Member States with VAT refund schemes for charities
Throughout the EU and the UK, refund systems are currently in place. However, these are mainly targeted at public bodies.
- This massively disadvantages charities as it favours the provision of services by public bodies, which are entitled to a refund of VAT, while charities cannot recover VAT costs where the service is VAT exempted or financed by grants.
- In a number of Member States, we observe growing pressure on charities to play a greater role in providing social welfare services and on foundations to help support such work. However, the current system provides a disincentive to contracting out because charities face irrecoverable VAT unlike public bodies.
Denmark, Ireland and the UK have acknowledged the burden this represents for charities and have extended national refund schemes to charities. The Danish and Irish models apply to a wide range of activities but are capped. Unlike these two countries, the UK has adopted a sectoral approach. These refund schemes demonstrate the problem of VAT and a way to tackle it. If finances do not permit a full refund, even a partial refund would greatly assist the service-providing charities and the foundations that support them.
While these schemes are helpful, ECCVAT believes that all Member States should apply a level playing field between charities and public bodies through extending national refund schemes to charities. Improving the VAT treatment of charities will have a positive impact on the lives of millions of Europeans benefiting from services provided directly to them by charities.
For more detail click here to see our position paper.