This recommendation has been proposed on many occasions over the past number of years. There are a number of reasons why the proposal could not be resolved through the Finance Bill process, the primary one being that such VAT refund schemes are no longer possible under EU VAT law. Further to this, the real question is whether VAT refunds are the most appropriate intervention in the first place, when more targeted grants, based on public policy priorities, would be a more effective use of Exchequer funds.
In terms of legislation, the position is that the VAT regime and rating of goods and services is subject to the requirements of EU VAT law — with which Irish VAT law must comply. Under EU law it is not possible to remove or reduce the VAT rate for a particular customer — in this case charities, or indeed, educational institutions — as the rate of VAT that applies to a particular good or service is determined by its nature and not by the category of customer. It would therefore not be possible to remove or reduce VAT paid by charities. Furthermore, under Council Directive 2006/112/EC — charities — bodies supplying educational services and non-profit groups engaged in non-commercial activity are exempt. This means they do not charge VAT on the services they provide and cannot, therefore, recover VAT incurred on goods and services they might purchase. Essentially only VAT-registered businesses which charge VAT are able to recover VAT.
With regard to the question whether charities could be refunded by the introduction of a ministerial order, the position is that these have been used in a limited way in the past to provide refunds of VAT on certain aids and appliances for the disabled, and on medical equipment donated voluntarily to hospitals, equipment and buildings used by water rescue organisations and humanitarian goods for export. These orders are focused and designed to target specific circumstances. However, under EU law, it is no longer possible to introduce new schemes within the VAT Act 1972, to relieve charities or other exempt bodies from the obligation to pay VAT on goods and services which they provide.
EU law precludes removing or refunding the VAT which charities and exempt bodies are required to pay under the taxation system. This view is also held by the European Commission, which has stated that while charities cannot be refunded through the VAT system, there is nothing to prevent national Governments paying charities a subsidy to compensate them for the irrecoverable VAT which they have incurred, provided that State aid rules are observed.
It is interesting to note that the Irish Charities Tax Reform Group, ICTRG, understands that charities cannot be granted VAT refunds through the tax system. However, it is seeking the introduction of a grant or subsidy in lieu of VAT charities must pay on business inputs. Given that Exchequer funding is made available to very many charitable organisations, this is in effect already happening. The 140 bodies represented by the ICTRG already acknowledge that they receive €8.6 million in funding either directly or indirectly from the Exchequer. However, there are more than 7,000 charities registered with the Revenue Commissioners. A recent report carried out by Trinity College on behalf of charities estimates that their annual spend is approximately €2.5 billion per annum. If even a small part of this sum were subject to a VAT refund, the cost would be astronomical.
The ICTRG will argue that it represents the largest charities but that is not the case as many health, educational and sports organisations are also registered with the Revenue Commissioners as charitable or not-for-profit organisations. Therefore, the introduction of a grant in lieu of VAT paid by registered charities would undoubtedly lead to other exempt bodies, such as schools, hospitals and sports organisations, many of which are already registered as charities, seeking to benefit from such a refund scheme. These exempt bodies are already receiving considerable Exchequer funding.
While I appreciate the arguments that have been made on the refund scheme in Denmark, the only EU member state to operate such a scheme, it should be understood that Denmark only operates a single VAT rate for all goods and services of 25%. This is the highest in Europe. Ireland operates a far broader regime and has three VAT rates — 0%, 13.5% and 21%. The grant scheme in Denmark is limited to a number of charities that benefit from the tax relief on donation scheme. However, the Danish donation scheme is far more limited than ours, with almost half the number of charities able to avail of it. In Denmark, educational institutions do not qualify for charitable status, which would preclude them from receiving any tax relief.
While just one country might be offering a VAT refund scheme, this must be considered in the context of the overall environment in which such schemes operate. In this regard, it should be noted that our tax code currently provides exemptions for charities from income tax, DIRT, corporation tax, capital gains tax, capital acquisitions tax, stamp duty and dividend withholding tax. Moreover, charities also benefit significantly from the uniform scheme of tax relief for donations, which was introduced in the Finance Act 2001 and which, for the first time, allowed tax relief generally without any upper limit on personal donations to domestic charities and other approved bodies. The relief is based on the marginal rate which, for an individual donor, could be as high as 41%. In the case of donations in the PAYE sector, the relief is given directly to the charities.
Even if funds were available for grant-aiding charities and other voluntary groups, I am not sure the most appropriate use of the funds would involve relieving charities of the VAT paid on inputs as opposed to grant-aiding their activities using other criteria, as has already been done. It is the role of the Government and the Oireachtas to decide on the distribution of tax revenue for the public good and we should not lightly give up our role in this case. Since the mechanism that would have to be used is a grant scheme, we would be agreeing in advance to give grant aid to a set of bodies based not an understanding of public policy priorities or the efficiency of the bodies concerned but on their spending profiles. The proposed recommendation does not conform with this principle and therefore the grant scheme in question would be most unusual.