VAT (Charities)

Ian C. Lucas Excerpts

Tuesday 19th October 2010 Commons Chamber

[Ian Lucas (Wrexham) (Lab)]

It is a pleasure to be here this evening, Mr Deputy Speaker.

First, I would like to declare an interest as an unpaid patron of two charities in Wrexham—The Venture and Dynamic. Many Members will be involved in charities in their own constituencies. There are, in fact, 177 charities registered in my constituency, although, of course, many more provide services there. All MPs see the positive work that charities do. In Wrexham, I have seen the development of services provided by charities since I was elected in 2001, often co-ordinated by the Association of Voluntary Organisations in Wrexham. Many services are provided in partnership with the NHS, such as the Nightingale House hospice in the town, and some work with the local authority.

There has been an expansion of the work of charities in recent years often to cover work that previously was carried out by the Government—at local or, indeed, national level. It is this concept that, I believe, the present Government wish to accelerate through the development of the Prime Minister’s concept of what he calls the big society. This process has created an anomaly. Services previously provided by local government benefited from an exemption, under section 33 of the Value Added Tax Act 1994, allowing local authorities to reclaim irrecoverable VAT incurred for non-business purposes. The rationale was that the VAT burden should not fall on local taxpayers. In a world where services are increasingly provided by charities, it seems unfair to require charities to bear that burden. Although the problem has existed for some years, it will necessarily be made bigger as more services are provided by charities, rather than by central or local government.

What undoubtedly makes the problem more acute is the Government’s decision to increase VAT from 17.5 to 20%. That was a choice made by the Government. At the same time as deciding to increase VAT, the Government chose to announce a decrease in corporation tax, which benefits Barclays bank, for example, but does not benefit charities, which do not pay it. The Charity Tax Group has calculated that the increase will cost charities £143 million—money that will go directly into the pockets of the Government. I would like to place on record my thanks to the Charity Tax Group for the considerable work it has done in raising the issue. As a first step towards addressing the problem of irrecoverable VAT, will the Minister agree with me that the Government should not benefit from charities having to pay more VAT? If the big society is to mean anything, how can charities be expected to bear an additional financial burden while being required to provide additional services?

I contacted local charities in the Wrexham area to try to assess the impact of the VAT rise on them, and a number came back to me with figures. Earlier I mentioned Nightingale House hospice—probably Wrexham’s best known local charity—which provides excellent care to local individuals suffering from cancer, many of whom end up dying. We all have hospices in our areas that provide excellent care, and the Nightingale House hospice told me that the increase in VAT would cost it around £10,000 a year—money going directly to the Government.

Hardest hit, however, will be those charities that provide goods and services for sale to vulnerable people. Vision Support is a charity that helps those across north Wales with a visual impairment. It has a large trading arm and supplies specialist equipment to the blind and partially sighted, such as phones and computer aids. Its VAT liability was £155,371 for the year ending 31 March 2010. The Government’s action means that the charity would have to pay an extra £22,195.86 in VAT—money that it cannot use to provide services to some of the most vulnerable in the community that I represent. Again, the money goes directly into the pockets of the Government. Can that approach really be justified?

[Jim Shannon (Strangford) (DUP)]

The hon. Gentleman has clearly outlined the issue for charities, but along with charities, there are probably literally hundreds of thousands of volunteers who do great work in constituencies across the United Kingdom. Does he agree that the change will affect not only charities, but volunteers and the good work that they do, and that this underlines the need for a VAT exemption for charities?

[Ian Lucas]

Certainly. We want to encourage volunteers in our society. They contribute hugely to community spirit, but it must be demoralising for them to have the hard-earned funds that they have raised taken away from them.

The issue is one that the Government should try to confront and deal with. It has been dealt with in particular circumstances in the past; for example, it was recognised by the last Labour Government, in their listed places of worship grant scheme. This paid the equivalent of the VAT expended on repair projects for listed places of worship back to those organisations. I have received representations from the Church in Wales asking the Government to extend that scheme beyond its end date of March 2011. Will the Government commit to pay charities generally the extra VAT that they obtain from those charities as a consequence of their own decision to increase the level of VAT? If the Government do not do so, that will diminish the capacity of charities to carry out their work.

[Jason McCartney (Colne Valley) (Con)]

I congratulate the hon. Gentleman on securing this Adjournment debate. I wrote to the Minister recently about the Yorkshire air ambulance service, which receives no direct Government funding but needs £7,200 a day to keep both its air ambulances in the air. It currently has no exemption from paying VAT on the aviation fuel that it uses, but another charity, the Royal National Lifeboat Institution, is exempt from such charges on the fuel it buys for its lifeboats. Does the hon. Gentleman agree that this is yet another example of the inequality surrounding the payment of VAT by charities?

[Ian Lucas]

Indeed. I am sure that all Members of Parliament are aware of charities in our constituencies that work extremely hard to provide services that we all value. The hon. Gentleman has just ably demonstrated yet another contradiction that I cannot understand. The Government really need to address this issue as broadly as possible. If they do not do so, it will diminish the capacity of charities to carry out that valuable work in our communities.

I assume that this situation is directly contrary to the Prime Minister’s intentions. If the big society is to be anything more than a vacuous soundbite, its proponents should be extending the capacity of charities rather than reducing it. We need to discuss this complex issue. Irrecoverable VAT has existed for many years, but charities are now carrying out more work and local authorities are asking them to do more work on their behalf, and the time has come for the Government to assess their role and the tax that they pay, and particularly to examine the burdens that will be imposed by the increase in VAT. They must then take steps to address this anomaly.

--- Later in debate ---

[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.