Thank you. The ICTRG wishes to extend its appreciation to the joint committee for inviting us here today and for facilitating our presentation. I will briefly introduce the rather large delegation, as follows: Ms Niamh Ní Chonghaile, financial controller of the Irish Cancer Society and a former chairperson of the ICTRG; Ms Sheila Nordon from our sister organisation Irish Charities Tax Research, who is here in an expert capacity; Sr. Martha Hegarty, a member of the Daughters of Charity, who is a director of Respect; and Mr. Matt Moran, who is with the Sacred Heart Missions in Cork.
It is our intention to explain our work for tax reform on behalf of Irish charities, particularly our proposal to the Government for compensation for charities for value added tax, which they pay, and to respond as fully and comprehensively as possible to any questions which members of the committee may wish to raise.
By way of background, the ICTRG is a membership based organisation of more than 140 Irish charities and it works to increase funding to the sector through reform of tax legislation as it applies to charities. It was formed in 1991 and since then it has worked to optimise tax effective giving and reduce the tax burden on the sector. Its overall goal is to create a policy climate in which philanthropy can thrive in Ireland.
Among the issues on which we have worked successfully with Government to date are the introduction five years ago of a comprehensive system of tax relief for all donations in excess of €250 for eligible charities and the introduction in the last year's budget of income tax relief to gifts of publicly quoted shares to charities.
We are currently engaged in four principal issues which are as follows: removing the VAT burden on charities through the introduction of a VAT compensation scheme by Government; reducing the minimum donation level for tax relief to €100 with a view to eventually removing the minimum altogether; extending tax relief to other non-cash donations, principally property; and actively supporting the development and implementation of charities' regulation.
Our priority is to seek a positive Government response to the demand by charities for compensation for the currently unreclaimable VAT they pay on expenditure. VAT compensation is a priority for the following reasons: the charities have identified it as having a significant impact on their ability to undertake their work; the EU Commissioner has stated that there is no impediment at EU level to such compensation being paid by EU member states; and the Danish Government recently acknowledged that charities have a right to such compensation and is now engaged with charities in finalising the practicality of a compensation scheme.
Most people, including many political representatives, will be unaware that a portion of the euro given to charities at different fund-raising events is returned to the Government by way of VAT payments by the charities involved. We believe members of the Joint Committee on Finance and the Public Service would not support the continuance of this situation on moral grounds. It is a situation that exists for purely technical reasons and we strongly believe this committee can work to achieve positive change with regard to this unfair tax on the good work of charities.
Five years ago Ernst and Young undertook an independent study and found that charities were then paying at least €18 million in VAT annually. Adjusted for inflation, this figure today is of the order of €25 million and can exceptionally be higher than that. That is €25 million not being spent on the most needy and vulnerable people and groups. It is not being spent on the good work charities undertake every day. It is being paid as an unreclaimable tax to the State. We believe this is wrong. The tax is paid on basic items such as fund-raising materials, promotion costs, essential equipment, professional fees, capital expenditure and necessary overheads, such as electricity and phone costs. Unlike the business sector, charities cannot reclaim VAT they pay on expenditure. This severely limits the work of charities with those most in need both at home and abroad. There is a very human cost to VAT for charities.
This situation exists because, under EU law, member states may not make direct refunds of VAT to charities since they carry out some non-business activities. Charities are treated as exempt from VAT under the Sixth EU VAT Directive which means that while they must pay VAT, they cannot recover it.
We have four key considerations we would like to bring to the committee's attention. The Minister for Finance has the power to relieve the VAT burden by compensating charities without contravening EU regulations. This has been confirmed by the current EU Commissioner and the previous one and we have circulated that written confirmation to members. The actual cost to the Exchequer of introducing a compensation scheme is minuscule in overall budgetary terms but constitutes a huge burden on individual charities. The advantage of a VAT compensation scheme is that control remains with the Revenue Commissioners as to what organisations qualify for refunds. This can be ring-fenced. In conversations earlier today, we discovered that two member organisations represented here have already undergone VAT audits by the Revenue Commissioners in the past 12 months. Revenue is aware that we are paying VAT but there is no way in which we can reclaim those funds. A VAT compensation scheme would be an incentive to charities to do additional good work.
The EU Commission position deserves further clarification. Last year the current EU Commissioner, Laszlo Kovacs, stated clearly that the VAT burden on charities can be relieved by way of a government grant scheme. Specifically he stated:
The Commission has always considered that any scheme designed to relieve the VAT burden for charitable activities can be regarded as compatible with EU legislation if it is clearly separated from the VAT system. [He further stated] I have to underline 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.
It can be regarded as compatible with EU regulation. The essential point to register is that as long as the VAT is collected at national level, a facility to give it back to charities is not an issue at Commission level.
In Denmark, the Minister for Finance and the Minister for Taxation have both confirmed to ISOBRO, the Danish equivalent of the ICTRG, that Danish charities are entitled to VAT compensation. The practical implementation of this compensation is now being finalised between ISOBRO and the relevant Danish government departments. This morning it was announced that allowance for this would be made in the forthcoming Danish budget for 2007.
It is important to emphasise that the amount of VAT paid by charities is not just a dismal statistic produced by accountants. It has a very human cost. It is worth drawing the committee's attention to some examples of this human cost. The €300,000 VAT paid last year by the Irish Cancer Society would run its entire cancer information help line for a year. Alternatively, it could provide eight additional oncology liaison nurses who offer emotional and informational support for cancer patients and their families within the hospital setting. It could support a full year's expenditure on immediate cash assistance grants to assist hundreds of people who experience financial stress due to cancer diagnosis.
The VAT bill paid by RESPECT would pay for two extra bungalows being developed at its facilities ensuring that 12 additional people with intellectual disability were properly and adequately housed. The VAT bill paid by Concern last year was €1.4 million. It could have doubled its work in Rwanda where it is working with 12 schools to provide community based health care for 12,000 children and operating a home based malaria scheme.
ICTRG finds it regrettable, given the clear position of the EU Commission, the relatively small amounts of funds involved and the positive impact that rectifying the situation would have on the work of charities, that the Department of Finance has yet to acknowledge or accept the clear position laid out by the Commission.
A written reply to a parliamentary question from Deputy Joe Walsh to the Minister for Finance on 17 October last sought to ignore the issue of VAT compensation, instead narrowly stating that "under EU law, it would not be possible to introduce new schemes within the VAT Act 1972 to relieve charities from the obligation to pay VAT on goods and services that they purchase". We accept and understand this but it is not what we are looking for.
In an earlier letter to the ICTRG on 14 September last, Paul Moloney, private secretary to the Minister, took virtually the same position adding that the Minister "has no plans to make any changes to the current VAT treatment of charities at this time". In previous correspondence from the Department, there is a concern that a VAT compensation decision would need to be extended to other sectors if the charity sector is facilitated. This is not so, in that there are many precedents where ring-fencing can apply in regard to specific legislation, for instance, tax relief on donations.
There are also precedents in legislation where some equipment used by people with disability can be purchased on a VAT refund basis. It is only necessary to expand on this benefit to ease the VAT burden on charities.
It is also relevant to note that the Government, on occasion, does not appear to have an objection in principle to VAT compensation. A former member of this committee, the Minister of State at the Department of Foreign Affairs, Deputy Conor Lenihan, stated on 10 November 2004 that he was "delighted to confirm that the Government will be able to provide a grant to the Band Aid Trust, equivalent to the amount collected in VAT on sales of the Live Aid DVD released earlier this week".
The current VAT situation with which charities are faced is nothing more than a tax on initiative and on the good work they are doing. VAT has a major negative impact on the work of these charities and the people they seek to help on a daily basis and forms a minuscule portion of tax revenues for Government. The committee can bring this issue to the attention of the Minister and the Department of Finance. It can seek agreement to bring the proposal to provide VAT compensation charities back to the House as an amendment to the forthcoming Finance Bill. We would greatly welcome the support of the committee and the personal support of its chairperson in facilitating progress in this regard. We will be happy to supply any further information that may be required.
We feel that we have been arguing and calling for this change since 1991. There have been 15 years of debate and discussion and we strongly believe that it is time to resolve this problem. We thank the committee for its attention and we will happily respond to any comments or questions.