Charities make a significant contribution across the UK helping the most vulnerable by mobilising the good will of millions of people. But very often the vital service and support these groups provide is only possible because of tax reliefs and exemptions. Rules around tax exemptions for charities are often complicated and open to interpretation. But when you combine this with a government agency – HMRC – which has been instructed to raise tens of billions in additional revenue over the next few years through tougher and more aggressive compliance work, the situation becomes less than ideal for the third sector.
A National Audit Office report from 2013 noted that this new aggressive approach by the charities team at HMRC had led to a four-fold rise in the tax recovered between 2010 and 2013. For every £1 invested in the charities team, the report says, HMRC could expect a yield of £44, compared with an average of £11 across HMRC’s work as a whole. Although many of these gains are legitimate, it is clear that some are based on flawed interpretations of tax exemptions.
Take for example Caritas Anchor House. Located in Canning Town in the London Borough of Newham – the most deprived ward in the second most deprived borough in the country – the charity acts as a residential and lifeskills centre for over 230 single homeless adults each year as well as providing education, guidance and personal rehabilitation to residents and members of the local community. They include many who have experienced the criminal justice system, poor education, poor mental health and substance misuse.
In November 2014 the charity embarked on building a development of 25 self-contained ‘move-on’ accommodation units, which would allow residents to live more independently before moving on to their own accommodation. Historically the charity has been able to reclaim VAT on the construction of new buildings. However, part way through the development process of this new housing project the charity was told by HMRC that it would not be able to reclaim VAT. The unexpected change in HMRC’s stance was based on a change in the language Caritas Anchor House uses on its website to describe itself, without any actual change to the services provided. When additional fees to challenge the decision are included, this could cost the charity as much as £1.5 million, money for which it has not budgeted for and does not have.
Last year, HMRC lost its appeal in a long-running VAT case involving a charity, Longridge, that provides boating and other water-based courses for young people in Buckinghamshire and was trying to build a new training centre. If the charity had lost this case, it would have had to foot a devastating £135,000 bill.
The irony is that many of the charities HMRC are targeting generate a considerable benefit for the Government. Oxford Economics recently calculated that Caritas Anchor House provides £3.98 in benefits to society for every £1 invested in its operations. The charity’s residents undertook 2,500 hours of volunteering between April and July this year and 27% of residents in 2014 were able to find full employment. The national average is barely half that.
HMRC needs to look at these cases more closely and ensure that interpretations of tax exemptions are correct. Otherwise more charities will, unjustly, be faced with spiralling costs and possible closure. Vulnerable people will be put at risk and local authority services will be put under even greater pressure. At a time when it is seeking to make major savings and relying on the charitable sector more than ever this should be a real concern for the Government.