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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.

Charities and VAT

The problem

Most of the services that charities provide are either exempt or outside of the scope of VAT because they are provided free of charge or with a substantial subsidy.

In both cases the charity cannot charge VAT and so cannot recover the VAT on its expenditure – this is called “irrecoverable VAT”.


Irrecoverable VAT has grown significantly over the years as VAT rates and the range of services provided by charities have increased.

Irrecoverable VAT causes significant reduction in the resources charities have to spend on their charitable purposes and can also cause economic distortions.

Developing role

Given the constraint on public finances, charities are under pressure from governments to increase front-line services.

As a result, they are playing an increasing role in supplementing and even replacing state provision of vital social and healthcare services.

Charities are generally closer to the communities they serve and can provide services more effectively than the public sector. The volunteer resource helps the sector mobilise quickly and cost-effectively.



The cost

According to estimates by ECCVAT, charities in the EU lose about €6 billion a year in irrecoverable VAT.

This would be even higher if it were not for the reduced and super-reduced VAT rates and the introduction of national refund schemes in some Member States.

These lost resources could be better spent on charitable activities.