Charities are generally exempt from VAT under Irish and EU VAT law. This means that they do not charge VAT on the services they provide and cannot recover VAT incurred on goods and services that they purchase. Only VAT registered charities which charge VAT are able to recover VAT, with the exception of exported goods and donations of certain medical research equipment. This places a signification VAT cost burden on charities and as a result, this announcement from the Minister is a breakthrough for charities and the sector who have been campaigning for it for decades.
A working group was formed in 2015 to examine proposals to reduce the VAT burden on charities and on the basis of these deliberations, the Minister for Finance announced a VAT Compensation Refund Scheme (the "Scheme") as part of Budget 2018 to compensate charities for the VAT they occur on their inputs, in recognition of the work undertaken by the charities sector.
How will the Scheme operate?
The Charities VAT compensation scheme will take effect from 1 January 2018 but will be paid one year in arrears i.e. in 2019 charities will be able to reclaim some element of the VAT costs arising in 2018. Charities will be entitled to a refund of a proportion of their VAT costs based on the level of non-public funding they receive. For example, where a charity's gross income for 2018 involves 30% funding from State/EU/international organisations and 70% privately sourced income including fundraising, subscriptions and donations, they may claim 70% of their VAT input costs for the year.
There are a number of exclusions to the scheme including:
- VAT incurred on private non-charity related expenses will not be eligible for relief;
- VAT incurred that is subject to an existing VAT refund order will not be eligible for relief;
- VAT incurred that is otherwise deductible will not be eligible for relief.
A capped fund of €5 million will be available to the scheme in 2019. The scheme, including the amount provided in the fund, will be subject to review after three years. Where the total amount of claims in a given year exceeds the €5 million capped amount, charities will be paid on a pro rata basis, e.g. where the total value of claims by all charities in 2019 amounts to €10 million, each charity will receive 50% of their claim.
Claims under the scheme cannot be made until 2019 as it will take some time for Revenue to establish IT and administrative systems. Qualifying charities must be registered with the Charities Regulator, have tax clearance, and provide a set of audited accounts for the year in which the claim is being submitted. For administrative purposes, claims valued below €500 will not qualify.
How can PKF O'Connor Leddy & Holmes help?
- Seek Tax Clearance on behalf of charities
- Assist with the preparation of audited accounts
- Preparation and submission of claims to the Revenue Commissioners
The detail for the Scheme has not been included to date in the Finance Bill 2017 but it is hoped that further detail will be included as the Bill makes its way through the legislative process.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.