VAT a disgrace

The Church of England is today celebrating a gift of £30 million extra a year from the Government which is cutting services and laying off workers in order to cut costs. This windfall is on top of the £12 million a year churches already receive as part of the Listed Places of Worship Grant Scheme (LPWGS).  

The origins of this gift can be found in the fiscal theme park of VAT.  Bear with me whilst I explain.  VAT has traditionally not been charged on supplies of alterations to listed buildings, when they are  used for charitable purposes or as a church. This "zero rating" did not apply to repairs. This created a VAT anomaly.  For example, if you repair a wall you will be charged VAT;  move the same wall -  or build a new one  - you will not be charged VAT.

The last budget removed the VAT free status of alterations. At the time, the budget note stated:

"Removing the zero rate removes a perverse incentive to change listed buildings rather than repair them and ensures that all alteration works receive the same tax treatment."

The removal of the zero rating means that all owners of listed buildings who use them for charitable purposes will pay more for any alterations.  Repairs will remain unaffected as VAT will still be charged.

This is bad news for charities, but not for churches thanks to the LPWGS.  VAT is a European based tax and rules are consistent across the member states. Those rules do not allow charities or churches to recover VAT charged in respect of their charitable activities. To get round this the Government uses the LPWGS to  give grants to churches which match exactly the VAT that would be recovered had the VAT system allowed it.

Until now, the scheme which started 11 years and £133 million ago, only covered repairs.  Today's annual £30 million gift from the Government to the churches, means that the scheme will be extended to alterations as well.

So what does this mean for charities and churches?
 
The original VAT relief was intended to help defray some of the costs of providing charitable activities.

The current situation is that a church will effectively pay no VAT on either repairs or alterations.  By contrast a charity will pay 20% VAT on both.

According to the House of Commons briefing paper on the subject, the budget measure was expected to raise around £85 million in two years.  However, thanks to today's decision, a very similar amount will be paid to churches.  Or, in other words,  the extra charge paid by charities will all go to churches to subsidise their repairs and alterations.

This policy will take money from charities who provide care to the disabled and disadvantaged and will pass it to churches to pay for repairs to pews, bells, and organs. Excuse me if I don't join in the celebrations.


 

Note:  By way of perspective the Church of England had investment funds of £4.8 billion at the end of 2009.