Under the normal rules of VAT, VAT registered voluntary organisations can reclaim the VAT that they incur, including on their fundraising costs, when this relates to taxable business activities.
Charities also benefit from special VAT exemptions and reliefs on the income of certain fundraising activities—such as the sale of goods and services at certain fundraising events, and the sale of donated goods. European VAT agreements entered into by successive governments mean that it is not possible to extend these fundraising reliefs and exemptions, or to introduce any new ones.
The voluntary sector’s irrecoverable VAT costs have been considered by the Government in two major reviews since 1997. In the course of these reviews it was not possible to find a VAT solution that was practical, efficient, affordable, well-targeted and based on principle. Therefore, the Government have focused their support for charitable giving outside the VAT system, for example through gift aid, under which charities can claim the equivalent of 28p for every £1 donated. In 2005-06 the Government repaid £728 million to charities under this scheme.