Charities face a budgetary double whammy

Next week’s budget is likely to contain a VAT increase, which will dent the PM’s ‘Big Society’ plans


By Barry Frankfurt, June 17, 2010
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Next Tuesday, George Osborne will deliver his first budget - an emergency one - as Chancellor. His speech will offer the first big clue as to how the age of austerity will take shape. It will also provide the economic blueprint for David Cameron's "Big Society". The Prime Minister has defined government's role in this initiative as one that "will actively agitate for social renewal and community action". Certainly in the Jewish community, such action is delivered predominantly through the not-for-profit sector. Yet, more often than not, this is an interest group that is overlooked by Chancellors delivering their budgets.

Many people believe that charities are exempt from tax. Wrong! It is correct that charities benefit from gift aid and pay no corporation tax, but they suffer at the hands of the VAT-man.

The predicted Budget Day increase in Value Added Tax will hit charities with a double whammy. Indirectly, the more VAT that donors are paying on everyday purchases, the less they have to give to charity. In the prevailing economic climate, this will undoubtedly see a further fall in charitable donations over the next 12-18 months.

An increase in the rate of VAT also has a direct impact on the finances of charities and the amount they are able to use for charitable purposes. Recent research by the Charity Tax Group (CTG) estimated that, in 2009, the total amount of irrecoverable VAT paid by the charity sector was £1.3bn (twice as much as was received in gift aid in the same period). Should the rate rise, as feared, to 19 per cent, this will increase by approximately £86m, while a leap to 20 per cent will take it past the £1.4bn mark.

Although this figure is not solely covered by voluntary income, the CTG reckons that, for most charities, VAT equates to 3.6 per cent of all money donated. To give this some context, Jewish Care's VAT bill was £1.3m in 2008/09. This is more than the organisation spends in a year on the ongoing maintenance and refurbishment of its homes, centres and resources. To say that this money could be better spent elsewhere is an understatement.

Charities are the life-blood of the "Big Society" idea. Not only do they do much of the work at a local level, but they also remove a significant burden from the state. At a time when charitable giving is in decline (£9.9bn in 2009, down from £11.2bn in 2008), the government needs to act fast. An obvious starting point would be to exempt charities from VAT, freeing up over a billion pounds a year to help those that need it most. However, this alone is not enough. We need more imaginative legislation to kick-start a sector in financial difficulty.

One such approach would be to incentivise volunteering through a tax-deductible scheme similar to gift aid. Placing a tangible value on the hours donated to a charity by an individual and allowing a tax reclaim would encourage more people to do more for charity. Everyone has some spare time to give. Providing the not-for-profit sector with an army of incentivised volunteers would help to alleviate the fall in financial contributions. It would also help Cameron's "Big Society" to succeed.

Barry Frankfurt is managing director of a brand consultancy and creative agency for the charity sector

Last updated: 3:32pm, January 5 2011

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