The Treasury is to claw back hundreds of thousands of pounds from overseas aid money despite Gordon Brown's promise to waive tax on a charity record for Haiti's earthquake victims. After the quake on the Caribbean nation three months ago, which killed an estimated 230,000 people, the pop mogul Simon Cowell and 21 celebrities produced a version of REM's song "Everybody Hurts" to raise disaster relief funds.
The Prime Minister announced that he had decided VAT would be waived on the single.
But to the fury of aid officials at the Department for International Development, the Treasury has warned them that they will effectively be sent a bill for the Exchequer's lost revenue, The Independent has learnt – the equivalent of the "lost" VAT will be deducted from its budget.
The cash raid raises fears that each person who bought the single unwittingly deducted money from the Government's aid budget for other countries. Last night aid groups were astounded by the news and accused the Government of penny-pinching, warning that some of the world's poorest people could suffer as a result. Max Lawson, Oxfam head of development finance, said: "It will be extremely disappointing if Malawi or Mozambique end up paying for the public's generosity by picking up Haiti's VAT bill." Melanie Ward, senior political adviser at Christian Aid, said: "The Government must now tell us whether DfID's budget has been topped-up with the amount lost because of this bureaucratic barrier."
One DfID official said: "It was a bloody cheek. There was a lot of irritation here with the Treasury. It seemed a bit rich at a time when we were already being asked to save £150m."
Malcolm Bruce, chairman of the International Development Committee, said Mr Brown had been "disingenuous" and "deceitful" in claiming the VAT would not be claimed by the Treasury. "Anyone going out to buy this single would have thought it was adding value to the campaign and the very fact of cancelling VAT was designed to increase the numbers buying it," he said.
Edward Davey, the Liberal Democrat foreign affairs spokesman, said: "This sleight of hand is a step too far. People who bought this CD in good faith will be disgusted to find out that what the Prime Minister presented as an act of generosity was little more than the daylight robbery of funds intended to help some of the poorest people in the world. Gordon Brown must come clean on what aid programmes have suffered in order to fund this hollow gesture."
Last night a DfID spokesman said: "Any matter relating to tax is a matter for the Treasury." But the plan to quietly dock the money from DfID has angered senior civil servants there, who already face Treasury demands to trim £150m in efficiency cuts from its £6bn budget. Although the sums involved may seem relatively small compared to the overall aid budget, their value is significant to individual projects.
Sources within Alistair Darling's department confirmed last night that the equivalent of the VAT would be clawed back from DfID's budget. A Treasury spokesman insisted that all the cash raised from "Everybody Hurts" would go to the Haiti relief effort. A Treasury source explained: "We can't, under EU law, exempt things from VAT. It has to be collected – in this case from the DfID budget."
Late last night No 10 intervened and tried to play down the row. A spokes-man for Mr Brown said: "No money raised for Haiti will be deducted from other development projects or the DfID budget.
"Dfid will reimbuse the initial cost of the VAT for the single but has an agreement with the Treasury that they will provide additional end of year financing to cover that cost. There will therefore be no impact at all on other areas of DFID's work or budget."
The cover version of REM's 1993 single was released eight weeks ago and topped the charts, selling more than 600,000 copies, according to Sony. It featured Mariah Carey, Kylie Minogue, Rod Stewart, Jon Bon Jovi, Leona Lewis, Cheryl Cole, Robbie Williams, Take That, Michael Bublé and a host of Cowell's X Factor contestants. Several of the stars were flown to the Haitian capital, Port-au-Prince, to meet survivors and publicise the record, which was released on Cowell's Syco label.
Syco and Sony donated all profits from the single to the Disasters Emergency Committee and The Sun newspaper's Helping Haiti fund. Médecins Sans Frontières also benefited. At least £1 from every CD and 50p from every download was pledged to the charities. Cowell and most production staff gave their time for free.
Announcing the record, the Prime Minister said: "I have already talked to Simon Cowell and I said there would be an exemption from VAT for a charity single. Simon Cowell can make a huge amount of money to help the people of Haiti." A production source said last night: "Our deal with the Government was that they would waive the VAT. We have that in writing. And they did waive the VAT on it. We don't want this to reflect badly on the single."
Three months on from the magnitude 7.0 earthquake, one of the worst disasters of modern times, more than a million people remain homeless and in need of urgent aid. Relief agencies have warned that more funds are needed, but have reported declining donations. Total costs of the reconstruction efforts have been put at more than £7bn by the World Bank. Britain is thought to have handed over £33m so far. Donations from the public have raised £94m.