Dail Question - December 5th, 2006

225. Mr. Allen asked the Minister for Finance if he will introduce a compensation scheme for charities who work in developing countries and who could do much more with fundraised moneys if they did not have to pay VAT on items and services. [41305/06]

Minister for Finance (Mr. Cowen): I should explain 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 the Sixth VAT Directive charities 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 recover VAT incurred on goods and services that they purchase. Essentially only VAT registered businesses which charge VAT are able to recover VAT.

Ministerial Orders have been used in the past in a limited way 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 are 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 from the obligation to pay VAT on goods and services that they purchase.

Furthermore, under EU law, it is not possible to remove or reduce the VAT rate for a particular customer, in this case charities, as the rate of VAT that applies to a particular good or service is determined by the nature of the good or service, and not by the category of customer. It would, therefore, not be possible to remove or reduce the VAT paid by charities.

In summary, EU law precludes removing or refunding the VAT which charities are required to pay under the taxation system. This view is also held by the European Commission, who have 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. Given that Exchequer funding is made available to very many charitable organisations this is in effect already happening.

I should say that the tax code currently provides exemption for charities from Income Tax, Corporation Tax, Capital Gains Tax, Deposit Interest Retention Tax, Capital Acquisitions Tax, Stamp Duty, Probate Tax 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 on personal donations to domestic charities and other approved bodies. The relief is based on the taxpayer’s marginal rate which for an individual donor could be as high as 42%. In the case of donations from the PAYE sector the relief is given directly to the charities.