02 March 2020
What we see, as one of the strongest charity teams in Scotland, is that this is partly for good reasons – sustainability and making sure every pound is spent well. However, it is also because the Value Added Tax system discriminates against charities, meaning they pay 20% more than most businesses and so prices them out of the market for newer property.
Charities cannot recover the VAT they pay on property costs but most businesses can. Because VAT is a European Union tax, after Brexit it will be possible to change - will the government do so?
VAT is a complicated tax in practice. A business charges VAT on the taxable supplies it sells and pays VAT on the supplies it buys. These supplies are goods or services. It pays the net figure to the government. A charity is not a business, so does not make taxable supplies, so cannot offset that input tax against anything. This is a general problem for charities but it has particular effects in the property market. We see charities struggling with the effect of this policy. Here are some examples:
We are acting for a charity trying to buy a recently built property that is perfect for their main purpose. They have been amazingly successful in fundraising. As the property was built less than three years ago, the seller has no choice but to charge VAT at 20% on the sale price. Accordingly, when competing with a business that can make full VAT recovery (most businesses, although there are exceptions such as financial services) the charity has to raise 20% more cash, all of which goes to the government. Even if the building was more than three years old so the seller has a choice on whether or not to charge VAT (the option to tax), it would almost certainly do so because it needs to recover the VAT it paid out in constructing the property.
We are also acting for charities wanting to lease property. In theory this is better because even if the landlord has opted to tax, the tenant charity can serve a notice disapplying the option to tax. However, if the landlord is wanting to recover its input VAT, that has a real cost to the landlord. Accordingly, we often see landlords putting conditions in a lease that the tenant is not allowed to disapply the option, or else refusing to let to charities. Given the way the tax system is rigged against charities the landlords are being perfectly sensible.
When a charity wants to construct a new building for certain charitable purposes, there are complicated schemes that can be used. However, there can be high costs in additional legal and accountancy fees, compliance and other taxes which reduce the benefit available to the people the charity is helping. These costs mean that the schemes are only suitable for larger projects. There is no doubt that some larger charities can deliver real benefit with larger scale, including being able to use such schemes. We also see superb work being done by small, volunteer charities with limited budgets.
There are a number of ways in which the tax system could be changed so that charities are not put to this particular disadvantage. The existing system could be amended slightly, or there could be more radical reform and simplification. As suggested recently by Reform Scotland this tax could become devolved to the Scottish Government.But as post-Brexit tax and economic policy develops, it is vitally important that MPs and the government appreciate the importance of this problem and work with the charity sector, and the public who benefit from charities, to develop the best solution.