Simplification and harmonisation of VAT legislation could significantly benefit nonprofits in the European Union, if the campaign led by the European Charities’ Committee on VAT (ECCVAT) is successful.
“Harmonisation of VAT law is a chance for charities to come together to change this landscape forever," says Günther Lustchinger, EFA President and Chief Executive of Fundraising Verband Austria. "With the European Commission’s proposals yet to be finalised, there is still time for nonprofits to influence key decisions in Brussels.”
Currently, the VAT system treats charities as consumers and therefore – in the large majority of Member States – they are unable to reclaim VAT costs as businesses do. 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 heavily subsidised. In both cases the charity cannot charge VAT and so cannot recover the VAT paid out in expenditure.
Charities in Member States face an estimated irrecoverable VAT bill of €6 billion each year. The scope of VAT has widened and rates increased, meaning that distortions in the current VAT system are worsening and may continue to do so as charities are pressed to
supply more services.
“The current VAT burden facing nonprofits in many EU Member States is immense,” says Robert Hinnerskov of the Danish Fundraising Association, ISOBRO. “We need to do all we can to ensure that any changes to the current VAT system favour nonprofits, recognising the social value of their work and that they operate on tight budgets, often heavily reliant upon volunteers.”
The first draft proposal for the restructure of VAT failed to recognise the role of charities in providing public benefit and the VAT environment within which they operate. EFA and ECCVAT stepped up lobbying activity to ensure that future proposals would reflect the unique situation imposed upon charities. Subsequently, the nonprofit sector has been increasingly referenced as a key stakeholder in the development of VAT policy.
A key step forward was the recent publication of a report commissioned from Copenhagen Economics proposing a number of possible solutions to the problems currently faced by charities. The report considers the options of levying a VAT charge on all charity services, thereby allowing the charity to recover VAT incurred on its costs, or introducing VAT rebate schemes for nonprofits.
These proposals were discussed at the Fiscalis Stakeholder Conference in Italy, this April. At the event, ECCVAT represented the sector, voicing nonprofit concerns and highlighting the importance of ensuring that there is a clear system that classifies charitable organisations and their relevant VAT status. Two possible charity VAT relief structures were recommended to the Commission where either a very low VAT rate is applied to charities' services or that a rebate scheme is introduced, similar to the one that is currently operative in Denmark.
The concern about introducing a low VAT rate is that it would only benefit those charities that charge for their services and those for whom VAT on expenditure is greater than the amount of VAT they would have to charge on their fee income. Where this is not the case, fees charged to charity beneficiaries would go up. This proposal would also do nothing for charities that have no fee income such as fundraising and free-supply organisations, grant givers, and state-funded organisations. Therefore the preferred resolution for charities is likely to be a nationally operated VAT rebate scheme.
“The rebate option is one that would benefit charities considerably, providing that the scheme would include a refund on expenditure linked to both non-taxable and exempt services,” says Hinnerskov . “Extension to charities that provide contracted-out services is essential to resolve VAT distortion on the input side. Initial feedback from the Commission is positive, suggesting that they support this proposal and that there is no fundamental objection in EU law.”
The European Commission’s ambition to establish a common VAT system across Europe creates an important strategic opportunity for the charity sector to come together and tackle the significant VAT burden head on. ECCVAT is leading the charge and sector bodies are encouraged to get involved and lend their support to the campaign.
John Hemming, Chairman at ECCVAT, says: “The sector needs to be engaged at all stages in this vital process to ensure that all options to improve the VAT system for charities are explored thoroughly and appropriate solutions are introduced. ECCVAT and EFA will continue to represent the sector on this issue and would welcome support and involvement in this campaign from charities across the sector.”
The VAT reform proposal is due to be launched for public consultation in mid-2014, followed by a new proposal in 2015.
More regulatory briefings:
To read up about other key areas of legislatory reform and development and how they might impact your organisation, click on the links below:
• Data Protection – Reform of data protection is an emotive area that has seen more than 3,000 tabled amendments to the initial proposal launched in 2012. How will the proposed centralised regulation impact charities? Read more.
• European Foundation Statutes - a specific tool developed to help foundations better channel resources across borders, helping to promote and facilitate cross-border philanthropy. This is particularly important as it is the first time that there will be one central EU definition of charitable foundations and purposes. Read more.
• Single Euro Payments Area – SEPA is nothing new for cross-border payments in the eurozone, but the need for all these nations to meet SEPA requirements in regular domestic transactions from February 2014 is already having an impact on charities. Read more.