Since the 1970s a common Value-Added-Tax (VAT) system has applied to all EU Member States. This system is regulated by a series of EU directives, the most important of which is the Sixth Directive (77/388/EEC), recast in 2006 and known as “the VAT Directive” (2006/112/EC)
EU VAT system – A taxation mechanism intended to introduce a fair tax on consumption
Under the EU VAT system, the cost of the tax is borne by final consumers of goods or services, with suppliers normally able to recover VAT on the materials and services that they buy for use when producing goods and services. The model was intended to be a simple and fair tax on consumption that would apply equally to all. However, when the original VAT system was developed, the special position of charities and foundations were not considered.
Specific position of charities and foundations
Charities are penalised under the current VAT system because in most cases the services they provide are either exempt under EU law (Article 13 of the EU’s Sixth VAT Directive – Articles 132f of the new version) or are outside of the scope of VAT because they do not charge for the services they provide. In both these cases, the organisations cannot charge VAT to their customers or beneficiaries and so cannot recover the VAT on their expenditure (materials and services they buy for use when producing goods and services). They are, in effect, treated as final consumers even when they are not.
The inequity of the current situation has long been recognised by the European Commission and the European Parliament, both of which have acknowledged that the VAT treatment of charities is unsatisfactory.
Charities are therefore treated less favourably than commercial organisations which can charge VAT (and recover VAT). Also, in several countries, local authorities (public bodies) do not charge VAT but are able to get a refund of the VAT that they incur. The facts and figures resulting from this extraordinary situation whereby charities are treated less favourably than commercial organisations and public bodies are striking.