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NEWS > Charity Sector News > What is the VAT compensation scheme and why is it so important to charities?

What is the VAT compensation scheme and why is it so important to charities?

The VAT Compensation Scheme came into being on 1st January 2018 and started it’s life as a three-year pilot programme taking us up to 31 December 2020. With that period now passed the scheme is currently under review and we await a decision on whether or not it will be continued, expected in Budget 2022 on 12th October 2021.

As you might be aware, the scheme allows charities to claim a refund of a proportion of their eligible VAT costs, based on their level of non-public funding.

When the scheme was originally announced it’s fair to say that there was a level of uncertainty across the board. Many were unsure about how exactly the scheme would work, whether the €5m announced was enough, how accessible the scheme would be and whether or not we would see a significant uptake in the scheme from charities.

Three years on when looking at the numbers of those availing of the scheme, the results speak for themselves. Over the course of the pilot period the scheme has been significantly oversubscribed in every one of the years. At the end of this period, it is clear that the €5m cap is proving insufficient in meeting the demand.

Across the three years the claims vastly exceeded the €5m available. In 2018, claims made were valued at just over €37m; for 2019 claims amounted to over €39.5m and for 2020 claims were made for almost €32m.

As the pilot finished up, we wanted to take a pulse on how the scheme was viewed amongst users. In April 2021 we conducted a survey [of members] to ascertain the value of the VAT Compensation Scheme to the sector and to assess how the scheme worked operationally.

Almost 90% of respondents reported that the VAT Compensation Scheme claims process was straightforward and easy to follow and that for the charities that did need to engage with Revenue, that experience was overwhelmingly positive.

The survey also highlighted the value and importance of the scheme in empowering charities to deliver on their mission. Many spoke about how the scheme enabled them to dedicate more funds to delivering their vital services. It was particularly apparent for members that throughout Covid-19 the scheme became even more important as demand for their services rose dramatically.

The introduction of the VAT compensation scheme didn’t happen overnight. The sector, led by Cii, has fought for many years for this initiative. As the Government continues to consider maintaining it,  we are working hard to encourage them to raise the €5m fund and support as many organisations as possible.

The burden imposed on charities by VAT diminishes their capacity to deliver services which have such an incredible impact on some of our most vulnerable citizens. It also promotes an over-reliance by charities on state grants and the taxpayer. It’s also at odds with Government efforts to regulate the sector in that it penalises good governance in organisations that use professional financial, legal and training services.

Should the fund be increased we do believe that there should be a claim ceiling of €1m. Our rationale for this is that the scheme was developed to support charities who are less dependent on the state as they rely primarily on fundraised income. Our concern is that if there isn’t a ceiling then there is a risk that smaller charities may become displaced by larger charities and be less inclined to submit claims due to the amount of work involved in making a claim to receive a small payment.

We await an announcement on 12th October and look forward to good news, watch this space!

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