The Exchequer Secretary to the Treasury (Mr David Gauke)
May I first congratulate the hon. Member for Wrexham (Ian Lucas) on securing this debate? I am pleased to have this opportunity to explain and discuss the Government’s policy on VAT and charities. Charities, voluntary organisations and social enterprises do so much for our country, and the Government are grateful for the significant contributions that these organisations make to our communities. The Government continue to support charities in a number of ways, and I will talk about our direct support for the sector a little later, although Members will appreciate that there is a limit to what I can say about that, ahead of tomorrow’s spending review.
It might help if I first put on record something about the VAT system and charities. A basic feature of the VAT system is that if VAT is not charged on outputs, it cannot be recovered on inputs. The implication of this for charities is that when no charge is made, as is generally the case, any VAT that has been incurred will not be recoverable. Of course, when a charity is registered for VAT and engaged in taxable business activities, this will enable that charity to recover its VAT costs in the normal way. We are not in a position to change the structure of VAT to protect charities fully from its impact, but we provide support for charities through the tax system, including some VAT reliefs.
Existing VAT zero rates for charities, which were introduced at the start of VAT, and which successive Governments have maintained, provide a benefit of more than £150 million to the sector. They include VAT zero rating on sales of donated goods, on medical and scientific equipment and on goods for use by disabled people for qualifying charities. Charities are not charged VAT on the costs of advertising in public media. In addition, they qualify for zero rating on the construction of certain buildings to be used for charitable purposes. All those zero rates are derogations from the normal EU VAT rules and represent benefits not enjoyed by charities elsewhere in Europe.
Mrs Jenny Chapman (Darlington) (Lab)
Will the Minister comment on the issues faced by charities when they charge one another for back-office functions, when we are trying to encourage them to become more efficient and deliver services in the most entrepreneurial and efficient way possible?
Mr Gauke
I am grateful to the hon. Lady for raising that specific point. I can assure her and other hon. Members that the Government will continue to look at options for cost sharing within the VAT system where these are available to us and where they represent an effective and efficient means of delivering support to the sector. We are currently looking at the implementation of the EU VAT exemption for cost sharing. The Government recognise efficiencies that can be achieved by organisations such as charities working together efficiently, but we also recognise the potential VAT barriers such organisations face when they share services in exactly the way the hon. Lady mentioned. We said in the Budget that we would work closely with charities and other affected sectors to consider options for implementing the exemption, which would help to remove some of the barriers ahead of a formal consultation that we will launch later in the autumn. I hope that that provides some reassurance to the hon. Lady.
Returning to the issue of zero rates, as the hon. Member for Wrexham will be aware it is not open to us under our European agreements to extend or amend the zero rates, but we recognise how valuable they are to charities, so we are committed to retaining the zero rates that we already have. Charities also benefit from certain specific VAT exemptions that apply to goods and services used in connection with fundraising events, providing further support for all charities.
VAT reliefs are just one element of the support that the Government provide through tax. Within the wider tax system, existing reliefs for charities are worth something like £3 billion a year, of which gift aid is the largest single relief. Gift aid is now worth nearly £1 billion a year to charities, and such payments to charities are increasing. Gross donations made under gift aid amounted to almost £4.6 billion in 2009-10—an increase of 6.5% over the previous year. We fully recognise the importance of improving gift aid. Charity representatives have been exploring proposals for reform with Treasury and HMRC officials on the gift aid forum. We will be exploring the forum’s recommendations before deciding on the best way forward.
The hon. Member for Wrexham wants us to go further and provide support for all charities to relieve them in respect of their irrecoverable VAT. As I have already explained, there is realistically very little that can be done within the VAT system itself. It is possible in principle to introduce a measure that would deliver refunds of VAT to charities in respect of their non-business activities. However, such refunds, which are a matter of Government expenditure rather than taxation, would represent a very significant cost to the Exchequer, especially given the current fiscal position.
We also have to consider that many charities are engaged in activities where they are in direct competition with private sector organisations, such as in the provision of care and welfare services, and it would be difficult to refund VAT that charities incurred in respect of those activities, as that would represent an unfair distortion of competition. Any scheme that could be devised might well be complex and administratively burdensome for charities to operate. In our view, it is far better for the Government, instead of introducing further complexities for charities, to focus on improving charities’ capabilities to improve their own affairs, and I will turn to this in more detail shortly.
Yvonne Fovargue (Makerfield) (Lab)
The charities that are engaged in competition with the private sector tend to be the larger ones, which go for contracts and are registered for VAT on their services It is the smaller charities which cannot get the VAT exemption that need the VAT to be paid back, because they are the ones that are suffering.
Mr Gauke
The hon. Lady is right to suggest that the problem is most acute for the smaller charities, but I do not think that that entirely detracts from the fact that in some circumstances those charities may well be in competition with the private sector in the delivery of welfare and care services. There may be a distortion of competition, and we ought to examine that very closely.
We fully recognise that the increase in the rate of VAT is unwelcome, but it is necessary to sustain public finances and ensure long-term fiscal stability. The burden of deficit reduction must be shared. It simply would not be right to single out one sector over another for special treatment, especially in view of the generous tax reliefs that have already been provided.
The hon. Gentleman and his party oppose the increase in VAT to 20%—which will raise £13.5 billion—but want to do more to reduce the deficit by raising taxes, which leads to the question of how those taxes should be raised. The last Government’s proposed solution in the form of a tax rise—which has been reversed—was the increases in national insurance contributions, which would also have affected charities.
Ian Lucas
The last Government also raised £3.5 billion from a tax on bankers’ bonuses. That is an alternative way of raising tax. Let me, however, return to the issue of the additional burden of VAT that the Government have chosen to impose on charities. The Minister has listed a number of the tax exemptions that already apply to charities. Why are the Government refusing simply to pass back to charities the additional revenue that they are receiving from the tax hike that was imposed on them?
Mr Gauke
I return to the central point. A refund system, whether for the recently announced increase in VAT or the irrecoverable VAT across the board—which, as the hon. Gentleman fairly pointed out, is a long-standing issue—would involve a considerable cost to the Exchequer. We must consider both the public finances and the most effective way in which we can help charities.
I want to say something about the Government’s support for the voluntary and charitable sector in addition to the generous tax relief provided, especially through gift aid. However, Members will appreciate that much of the detail is a matter for tomorrow’s spending review statement. The Government are proceeding with a new programme of activity to build the big society. The big society agenda requires the state not only to pull back when services can be provided more cost-effectively and successfully by charities, mutual organisations and co-operatives, but to help social entrepreneurs and voluntary groups to work in partnership with the state and gain access to the support and finance they need in order to provide innovative, bottom-up solutions where expensive state provision has failed.
Mrs Chapman
I wholeheartedly support the notion of the big society and encouraging charities to provide services. Among the key sources of income for those charities are philanthropic donations. Does the Minister not agree that people wishing to make donations are sometimes put off by the thought that some of the money they are giving is not being spent on the charitable objectives of the organisation concerned, but is finding its way back to the Treasury?
Mr Gauke
I imagine that exactly the same argument could apply if we increased national insurance contributions, which I understand is Labour party policy.
Ahead of tomorrow’s spending review statement, it is not possible for me to say how much of the overall Government budget will go to the sector, but we are providing structural support designed to make it more efficient and resilient, and reforming commissioning and procurement, which currently hamper its involvement in public service delivery.
During the spending review 2010 period, we want there to be more opportunities for the sector to be involved. We want to help the sector to access a wider range of funding to increase its strength and independence. We are establishing a big society bank to lever additional social investment into the sector, and we are reviewing ways to incentivise further philanthropy and charitable giving. The Government are keen to progress this project as quickly as possible. Any progress will, however, be subject to the availability of dormant account funds.
In conclusion, the Government are committed to making it easier for the sector to work with the state and to strengthening relations between the two. That will not happen overnight, but a stable, strong and independent voluntary sector is needed if we are to deliver on the big society and give power back to citizens and communities.
Question put and agreed to.