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Still no relief on charity tax pain

ALMOST 300 members of the Charity Finance Directors' Group met in London last week to discuss the Government's proposals on the future of taxation for the voluntary sector, outlined in the Consultation Document with the Budget.

The reaction was disappointment. While important incentives for giving have been included, the main demand - for a rebate of charities' VAT burden, or at least a big overhaul - have been ignored. There is no compensation for the phased loss of Advance Corporation Tax (ACT) relief, in effect a pounds 350m tax on charities' income, introduced this year.

Almost 400 years ago the concept of charity was first enshrined in English law. For 370 years since, Britain could boast that charities did not pay tax. Then, in 1972, after UK entry to the EEC, the Chancellor, Anthony Barber, introduced value-added tax. Principally a tax on sales, VAT was not meant to affect companies; it was an indirect tax on consumers. But, by their nature, charities are not businesses. They campaign and raise funds and are unable to recover tax on most spending. It was not a great burden when first levied at 5 per cent.

But successive governments saw the virtue of taxing spending rather than income. VAT rose to 17.5 per cent. In 1997 the cost to charities of irrecoverable VAT approached pounds 400m a year. Uniquely, they have been hit twice. As the tax burden shifted to indirect, not only did charities find themselves paying more in VAT, they were unable to reclaim as much income tax paid on covenants and the like.

For every 1p fall in the basic rate of income tax, charities lose about pounds 15m in tax reclaims. As rates dropped from 35 to 23 per cent, the cost to charities climbed by pounds 200m. With the prospect of more falls, income will be hit further.

The tax and VAT implications were lost on donors, perhaps fortunately. A 1996 survey found that 80 per cent of people thought charities did not pay tax and 90 per cent believed they should not.

What was more, as Conservative governments began to withdraw support from the welfare state, charities saw the VAT bill rise even further. Taking over roles played by local authorities, saving money by using volunteers, having to pay VAT and then listening to ministers talk of the tax benefits provided to charity made for all overwhelming sense of injustice.

In 1997 New Labour's manifesto for the voluntary sector appeared to embrace the goals of charities and, if it was to help to reduce government spending, volunteering had a vital role.

Weeks after coming to power the Chancellor announced the removal of ACT relief. It was a revenue-raising measure alongside the windfall tax on utilities and privatised industries, and charities were also hit. The total tax bill on charities was now building towards pounds 1bn, 8 per cent of total income. A furore was avoided by the negotiation of a seven-year phase-in and promise of a wholesale review.

Charities started to feel more optimistic that they were being heard and some compensation for the ever-rising tax burden was on the way. Voluntary organisations united in calls for a rebate in the cost of VAT, simplification of the tax rules and more incentives for giving.

Now, a year late, the Consultation Document has been published. Clearly the Government is unable or unwilling to meet calls for a VAT rebate. Concerns about EU law, misuse of charity status and pressure from the small-business lobby about fair trade are too great. This is not an uncaring government. When Tony Blair talks of a Third Way, a giving generation and helping those who help those who cannot help themselves, it is with conviction. But how is it to be done? Where do charities go from here?

The Consultation Document does include ways to support the sector. Government proposes help with income generation, which could turn the tide on the key issue affecting charities today - the falling number of donors. While not addressing specific requests, the proposals are valid. A lower tax burden would be a boon today, but the lifeblood of tomorrow's charity is its volunteers and donors. Without them, there will be no money to spend and nobody to do the work. But is the promise of help tomorrow good enough when charities are hurting today?

The proposals to extend Millennium Gift Aid and provide stimuli for payroll giving go further than expected, and there are signs the Government is ready to do more if charities show this would boost support. Both systems offer the chance to engage donors through a simple, tax-effective system of regular giving at affordable cost. With effective marketing, this must help charities to obtain and develop support. But they need some assurance that the tax reclaim will not continue to be eroded as the basic rate of income tax drops. Responses to the Consultation are due by 31 August, and the Government requests consideration of some 30 points.

While the proposals do not go far enough, by encouraging giving, they offer charities a rod to fish with.

Stephen Burgess is Charities Director at the accountants Saffery Champness. He serves on the management committee overseeing the new MP Secondment Scheme.