Charities welcome Cowen’s EU Vat refund comments

17 December 2006 By Susan Mitchell

The charity sector has hailed as a major breakthrough the government's admission that it could refund Vat paid by the charity sector.

Responding to a recent Dail question, Minister for Finance Brian Cowen conceded that he could compensate charities without contravening EU regulations.

A spokesman for the Irish Charities Tax Reform Group (ICTRG), a group of about 140 Irish charities, welcomed the development, saying it ''represented the first signs of change." It said that the group would continue to lobby government and opposition parties on the subject.

Unlike the business sector, charities cannot reclaim Vat on essential expenditure. The ICTRG is seeking compensation from the government for Vat paid on essential items, under the slogan Abolish Vat on Giving. Most charitable activity is treated as Vat-exempt under EU law. As charities don't charge Vat on services, they cannot reclaim Vat paid on building costs, phone bills, recruitment or the cost of fundraising.

This means that they pay up to 21 per cent more for goods and services than the commercial sector.

St Vincent de Paul (SVP) paid €2.1 million Vat in 2005 and estimates the 2006 bill will be €2.6 million.

The Department of Finance and the former minister for finance, Charlie McCreevy, previously claimed that there was ''no provision in EU Vat law for any refund of Vat to exempt bodies, such as those represented by the Irish Charities Tax Reform Group''.

However, this argument was dismissed at EU level. In 2005, EU Commissioner for Taxation and Customs Laszlo Kovacs said that, while member states could not make direct refunds of Vat to charities, they could compensate charities without contravening EU regulations.

Kovacs said that ''the decision to set up such a refund mechanism is strictly a national budgetary issue, over which the commission has no say or influence''.

Earlier this month - in response to a parliamentary question - Cowen acknowledged the existence of a compensation scheme in Denmark.

He said charities in Ireland were exempt from income tax, Dirt, stamp duty and capital taxes and that donations to charities were tax deductible.

A 2001 study by Ernst & Young found that charities were then paying at least €18 million in Vat every year. Today's figures are likely to be significantly higher, the ICTRG said.