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Brexit’s £1.5 billion boon to charities

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In the United States, it is considered scandalous when a partisan public official tries to deny a charity its tax-exempt status. But a combination of EU and UK law forces British charities to pay £1.5 billion in taxes to the government every year – something a leading charitable coalition says that Brexit could change.

A “clean Brexit,” the group says, could unleash the power of private philanthropy and create tens of thousands of jobs among nonprofits alone.

EU regulations do not allow its 28 member nations to exempt charities from paying the value-added tax (VAT) on items they purchase, known as “zero-rates,” without EU authorization. Brexit would give UK officials the flexibility to jettison those rules and usher in “transformational” tax reform, according to a report from the Charity Finance Group (CFG), a membership group representing more than 1,350 British charities.

Under current UK law, charities must pay “input” VAT – that is, taxes on some items it purchases – but are granted exemptions from charging “output” VAT – charging tax on most of its goods or services. The policy was meant to allow charities to offer their products to the needy at the lowest possible price.

But in practice, CFG says, this means charities cannot recoup the VAT they pay. The government also requires charities to charge “output” VAT on some of its activities. The total bill amounts to a transfer of approximately $1.96 billion (U.S.) from charities – and their donors – to the British government.

Even understanding these regulations requires sophistication beyond the reach of most philanthropies. “Charity VAT is one of the more complicated areas of VAT, which is a great shame given that many charities are operated by unpaid volunteers who have to administer the complex rules,” Bill Lewis, a consultant at Bates Wells and Braithwaite, told The Guardian. (You can see an overview of UK VAT regulations for charities here.)

The British government could provide charities with relief from certain measures immediately. But other exemptions are beyond its power as long as it is a member of the European Union.

The EU has stopped members such as Sweden from exempting nonprofits from paying VAT. In 2008, the European Commission reminded several nations that it does not “provide exemption from VAT for every activity performed in the public interest, but only for those which are listed and described in great detail” in its robust body of regulations.

As the British government considers paring down EU regulation in the Great Repeal Bill, CFG hopes Parliament will seize the opportunity to expand the “zero-rates” available to private charities. CFG writes:

[T]he government needs to convert existing charitable VAT exemptions into zero-rates or options to tax. Brexit does create an opportunity to do this, because currently the UK cannot create new zero-rates or change zero-rates without the agreement of all the other member states. As many countries in Europe do not have as large or effective a charity sector as the UK, there has been historically little appetite to do this.

But, CFG warns, not every post-Brexit scenario would make things easier for charities; some would be undesirable.

The report says the “safest” option is a “clean Brexit,” something critics call a “hard Brexit.” It would remove the UK from participation in every aspect of the EU – including its Single Market trading area, the Schengen Area of free movement, and the European Court of Justice. The government could use that freedom to unilaterally reduce the burden on charities.

However, a “soft Brexit” – staying in the Single Market without retaining EU membership – would create “the worst of all worlds,” CFG writes. It would require the UK to follow EU rules and regulations without having the ability to vote on them.

In Brexit negotiations now underway, the EU could demand the UK follow its VAT laws as a condition of accessing the Single Market. Brussels would be tempted to classify any move to reduce taxes, even exempting charities, as a British attempt to “undermine competition,” CFG writes. Only a fuller Brexit that removes regulatory overreach will benefit charities.

Reducing the government’s claim on charitable contributions amount to putting an army of charity workers on the streets, tending the needs of the poor and vulnerable.

“The impact of VAT reform would be transformational to the UK charity sector,” CFG writes, “freeing up hundreds of millions of pounds to be spent on helping advance good causes.”

Charities could transfer money away from “structuring activities in such a way to avoid large VAT bills and paying for advice” and pay more people to serve the needy. That would create “around 50,000 extra full-time jobs paying the National Living Wage and including pension contributions.”

The change in policy is supported by 63 percent of those surveyed by ComRes in a poll CFG commissioned.

Exempting charities from taxation makes sense for a host of reasons.

First, burdensome compliance costs are often crippling in the private sector. In the nonprofit world, they can be lethal.

Second, the regulatory environment has caused surviving charities to develop into “businesslike” operations which citizens see as “just another business,” Kathy Evans, chief executive of Children England, told a Conservative Party gathering last October. Evidence from across the transatlantic sphere shows that government regulations and subsidies have the power to divert philanthropies, even faith-based charities, from their higher mission.

Third, taxing charities is a kind of wealth redistribution from the poor to the rich and powerful. Every dollar of such taxation goes from the charity’s recipients to an MP. Complex regulations mean that charities must hire accountants or pay tax lawyers instead of stocking soup kitchens and food banks. As such, they are a most unwelcome market distortion.

Fourth, charging philanthropies a VAT requires those charities, in a small sense, to break faith with their donors. People give to charity to support its good aims: ending heart disease, fighting cancer, feeding the hungry, or teaching the illiterate. Taxation allows the government to convert privation donations into a revenue source for its own prerogatives, whether they emanate from Westminster or Brussels. St. John Chrysostom said, “Feeding the hungry is a greater work than raising the dead.” It is undeniably a better work than building a revisionist European history museum or erecting a multimillion-dollar political headquarters of dubious necessity or architectural value. Feeding the victims of the Grenfell Towers tragedy should not be subordinated to such causes.

Finally, redirecting donations from philanthropies to the government costs the underprivileged the opportunity to receive potentially life-altering help. Private charities do more to address the root causes of poverty than government programs, at far lower cost. Faith-based charities particularly carry the ability to inspire spiritual renewal and personal transformation that ends poverty-inducing behaviors and creates solid (and, one might add, tax-paying) citizens. While philanthropies lose part of their funds to current VAT policy, it is the poor, the outcast, the addicted, and the misguided who pay the price.

If Brexit eliminates barriers to charitable giving and the development of healthier intermediary institutions that directly care for the poor, it will be another example of how Brexit could enhance the life of the world.

(Photo credit: Dennis Jarvis. CC BY-SA 2.0.)

Rev. Ben Johnson Rev. Ben Johnson is Senior Editor at the Acton Institute.

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