Charities – why do we have to pay VAT?

As the Executive Director of a UK based Charity (Institute for Human Rights and Business) which is recognized as an expert institution by the UK Government and receives support from a number of Governments around the world, I am perplexed by the VAT rules as they apply to charities – as is our accountant.

The best financial advice we have is that we should not register for VAT given that only a minority of our operational work is conducted in the UK (and nearly all our funding comes as donations) and obviously the book-keeping cost of registered and maintaining VAT records is significant. Yet, we are having to pay VAT on most of our administrative costs here in the UK.

It does beg the rather naive question as to why Charities are required to pay VAT at all. If our role is really one of public purpose (and perhaps this is not always the case for every Charity – e.g. some of the private schools with charity status) then it would it not be a wonderful thing to free us from paying VAT at all – allowing this resource to be channeled into our work – in our case in many emerging and developing countries as well as the UK.

I guess it might work by all interested Charities receiving a special VAT number – and being able to reclaim all VAT on a quarterly basis, but not required to charge VAT to others. It will also assist in dealings with other contractors based in the EU – to whom we currently have to pay VAT if not so registered in the UK.

Why does this idea matter?

The 20% we need to pay transactions subject to VAT could be channelled into the work of the Charity itself. Surely this fits with the Government's plans for the third sector and the role we should play in British society and international development more generally.

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