REBATE MECHANISM FOR IRRECOVERABLE VAT FOR CHARITIES (Hansard, 3 April 1995)

§ Mr. Alan Howarth (Stratford-on-Avon)
I beg to move, That the clause be read a Second time.
The new clause would require the Government to provide information that would enable us to appreciate the scale of the problem of irrecoverable value added tax which faces charities.
We are asking charities to do more and more. For example, care in the community invites charities to play a new, more formalised and more extensive role in social provision. That is as it should be. Our aspirations for social provision are rising. We know that state agencies, crucial as they are, are insufficient. Of their nature, they tend to be broad-brush in their approach, somewhat clumsy and somewhat insensitive to the infinite variety of human need.
By contrast, charities at their best reach the parts of society that bureaucracies are unable to reach. Charities have entrepreneurial qualities, and they are cost-effective. 1489 It is right that we are seeking to mobilise them in a partnership to enlist all the resources of generosity in our society.
There is a perversity in our fiscal system, which lies in irrecoverable VAT. Charities are being asked to provide residential homes, day centres and respite care. They are expected to demonstrate cost-effectiveness by tendering against commercial organisations and to demonstrate their effectiveness compared with local authority providers.
At the same time, local authority providers, providing the same services as charities, do not have to pay VAT. Commercial organisations can reclaim VAT, or, if they are engaged in the provision of exempt services, they can build in a profit factor to offset the cost of irrecoverable VAT. That is not possible for charities for the greater part of their activity.
The services that charities provide are mostly VAT exempt or outside the scope of VAT. They are unable to recover the VAT that they have paid on necessary supplies to enable them to deliver services. The Charities Tax Reform Group estimates that the cost of irrecoverable VAT to the charitable sector is about £335 million annually. New research by London Economics suggests that the figure may be nearer £550 million.
I shall give some examples of the burden on particular charities. Methodist Homes for the Aged found itself paying £450,000 in irrecoverable VAT. The National Society for the Prevention of Cruelty to Children paid £650,000 in a year. Help the Aged paid about £750,000. The Royal National Institute for the Blind paid £1.2 million. Some charities are losing about 10 per cent. of their income in irrecoverable VAT.
If policy is to be consistent, and if we are to provide for fair competition in the developing market for care, we must redress the balance. The solution is the establishment of a refund scheme whereby charities would be compensated through Treasury grant in aid for a set proportion of the VAT that they incurred on their non-business expenditure. I emphasise that the charities would not keep the money that came back to them as profit; they would plough it back into services.
Such a scheme works successfully in Canada, where charities are able to reclaim half the amount spent in general services tax at the end of the financial year. The Charities Tax Reform Group has been advised by the European Commission that such a scheme would be permissible within European law.
The proposal is that the scheme should apply only in relation to non-business expenditure, which would go a long way to safeguard against fraud. Such a scheme would also be flexible, enabling my right hon. and learned Friend the Chancellor to vary the proportion of irrecoverable VAT which would be rebated according to the circumstances of the economy and his judgment of what he could afford.
Such a scheme ought to be attractive to the Treasury and to my hon. Friends on the right, because they could look forward, if they wished to do so, to some substitution of charitable activity for state activity. Charities also provide excellent value for money. This scheme should also have a broader appeal; it should recommend itself to others of my hon. Friends and to the Opposition, because it would make for a cost-effective increase in social provision.
1490 The standard objection advanced against this argument over the years is that it is Government policy to provide fiscal concessions to encourage charitable giving, and that we cannot have it both ways. Speaking as the chair of the all-party group on charities, I know that the increase over many years in tax concessions for charitable giving has been very much appreciated—at least until the March 1993 Budget.
Until that date, the cumulative value—I speak from memory, and my hon. Friend the Paymaster General will correct me if I am wrong—of tax concessions on charitable giving introduced by this Government amounted to £900 million a year. Since then, however, the Treasury has been somewhat less benign. In the March 1993 Budget, we saw the measure on advance corporation tax for charities and the introduction of VAT on domestic fuel and power. The consequence was that charities lost £100 million net in tax terms.
Alongside that fiscal setback, charities then and since have suffered from fairly tight restraints on the capacity of central and local government to make grants to them. The recession caused enormous difficulties for them in fund raising with the private sector. Charities have recovered very unevenly from the recession.
The Government's strategy of switching the emphasis from direct to indirect taxation and the prospect that my right hon. and hon. Friends hold out of progress towards a 20p basic rate of income tax challenge us to a fundamental reconsideration of the tax treatment of charities. We should not, of course, reduce the concessions for charitable giving, but we should recognise that encouragement for giving is insufficient.
There is, after all, a certain randomness. Although we should respect the wishes of donors to charities and should let them make their own judgments, we should recognise that, in terms of how social need is to be addressed, there is considerable randomness in the pattern of charitable giving. Although the great majority of charities are active, efficient and competent in what they set out to do, we cannot say that of all of them.
There is a case for a new emphasis on supporting charities that do things—charities that make social provision. It is often provision in unglamorous, unfashionable, but vitally necessary areas. My right hon. and hon. Friends ought seriously to consider how they will remedy the problem that the Government take more away in VAT from some charities that perform extremely valuable social tasks than those charities gain in concessions on charitable giving.
The Government want charities to play an important part in the pattern of social provision. Charities are strongly placed to do so. They are cost-effective. Their gearing, through their capacity to mobilise voluntary support, means that they have an enormous amount to contribute for the money that they dispose of. They are innovative.
We ought to be systematic in our encouragement and support of the charitable sector. I put it to my right hon. and hon. Friends that we need a systematic review of the tax treatment of charities and the totality of Government's policy in relation to charity, so that we can do our best to ensure that it is coherent and that charities are consistently supported.
The ways and means resolution and the money resolution that we have approved mean that it is not possible to table a new clause that would be in order 1491 which would provide substantively for the implementation of a compensation scheme such as I have argued for. Therefore, I have tabled new clause 16, which would require the Government to supply information that would illustrate the situation and the need. It is my hope that, in researching and considering the estimates that the new clause would require, my right hon. and hon. Friends will be persuaded of the necessity of a VAT compensation scheme.

§ Mr. Tim Smith
In recent years, charities have had to bear an increasing burden of VAT, as my hon. Friend the Member for Stratford-on-Avon (Mr. Howarth) has said. He is right when he says that we should have a comprehensive review of their liability to pay VAT. His new clause has my full support.

§ Ms Primarolo
I congratulate the hon. Member for Stratford-on-Avon (Mr. Howarth) on tabling new clause 16. As he said in his closing remarks, the ways and means and money resolutions are drafted tightly, so it would be difficult, if not impossible, to table an amendment that would be in order. He was right to table a new clause asking for information to identify the scale of the difficulty experienced by charities because of irrecoverable VAT. We support the principle that we should look carefully at the impact of the increasing importance of VAT as the major element in the Government's strategy of shifting from direct to indirect taxes.
As the hon. Member for Stratford-on-Avon highlighted, charities mostly provide services which are exempt from VAT. Therefore, they are unable to recover VAT where they have paid it on purchases of necessary supplies.
The director of finance and administration of the National Children's Home has said: The irrecoverable VAT burden of NCH in 1992/93 was £891,000. If it had been able to use that money to finance its activities, it would have been able to open and run another 20 family centres. As has been pointed out, examples such as the Canadian tax regime, in which proportions of tax are reclaimed by charities, are worthy of consideration by the Government. It would be important that any scheme limited the recoverable VAT to non-business expenditure only.
We support the principle of the new clause. I hope that the Paymaster General will tell us that the Government are willing to look closely at the difficulties that charities are experiencing. I hope that he will tell the House how we could introduce a sensible tax regime that did not penalise the charities to the extent that they are penalised now.

§ Mr. Heathcoat-Amory
I pay tribute to the good work done by the charitable sector, described eloquently by my hon. Friend the Member for Stratford-on-Avon (Mr. Howarth). The Government recognise that work by, for instance, granting tax reliefs, as my hon. Friend mentioned.
A number of specific VAT reliefs are granted for charitable purchases, which save the sector about £150 million a year—perhaps one third of its potential VAT bill. The reliefs cover purchases of medical research and rescue equipment such as lifeboats, equipment for 1492 disabled people, the construction of certain charities' buildings, and advertising to raise funds. Moreover, the sale by charities of donated goods is zero-rated, and admission to fund-raising events such as concerts is exempt. Those reliefs may be worth another £50 million. Direct tax reliefs are worth about £830 million, and exemption from business rates about £240 million.
It is clear that the charitable sector as a whole has been given a wide range of reliefs to enable it to do the good work that we expect of it. The general VAT rebate scheme outlined by my hon. Friend the Member for Stratford-on-Avon and others, which would apply to all charities, would be very expensive; it might cost a further £300 million a year—money that would either go straight on to the budget deficit or have to be found elsewhere. Moreover, such a scheme would give most benefit to bodies spending heavily on taxable goods and services, regardless of the aim of the charity or the nature of the expenditure.
Charitable status is widely granted: there are about 170,000 registered charities in the country. Both this evening and in discussions elsewhere, my hon. Friend has spoken of the importance of social provision by charities, but it would be almost impossible for us to differentiate between charities of that kind and the generality of registered charities—which include universities, providers of private medical care and public schools. We must be cautious about granting another general tax relief by way of a VAT refund scheme; the good it might do would not be particularly narrowly focused.
I now realise that the new clause was intended as a probing measure; before my hon. Friend made that clear, I was a little worried. The figures requested would be extremely difficult to obtain, certainly on a routine basis: much of the information could not be obtained from VAT returns, for the good reason that most of the activities involved are exempt from VAT or outside its scope, because the charities concerned are not registered.
Therefore, the information would have to be obtained from surveys, which would not only be administratively expensive for Customs and Excise but would impose on the charities a compliance cost that might not be altogether welcome. If my hon. Friend wishes to obtain further and better information about the sums involved, which is the requirement of the new clause, I should be happy to answer a parliamentary question.
I think that I said enough earlier to show that, although I am highly sympathetic to the aims of the clause, and genuinely acknowledge the work that is done by charities, especially in filling the gaps that must always exist in state provision and in finding new and innovative ways to respond to human needs, I must resist, without any misunderstanding, the thinking behind the proposal. We do not contemplate a general VAT refund scheme, despite the eloquence of my hon. Friend's pleadings.

§ Mr. Alan Howarth
With his usual astuteness, my hon. Friend has perceived that the new clause was probing. I am grateful to him for his sympathetic view of the issue. It is important, and I hope that the debate, which I am glad we have had, will encourage the Government to think systematically not only about this issue but about the totality of Government fiscal policy in relation to charities. I beg to ask leave to withdraw the motion.

Madam Speaker
We now come to new clause 18. The three hon. Members who are eligible to move it are Mr. Knapman, Mr. Alexander and Mr. Rupert Allason. As they are not present, the new clause falls.