Effectiveness of the Current VAT Treatment of Charities: Are the Objects of the VAT Exemptions in the Public Interest Being Achieved and If Not, How Can This Be Improved within the Restrictions Imposed by EU Legislation?
International VAT Monitor, No. 5, 2011
25 Pages Posted: 17 Nov 2011
Date Written: June 1, 2010
Charities are not mentioned as such in the VAT Directive. However, the VAT Directive provides for ‘Exemptions for certain activities in the public interest’. Most of the exempt activities are deemed charitable in many Member States of the European Union, for example medical care, welfare and social security work, education, religion, sports and culture. I will not discuss these exemptions in detail (the full text is included in Annex 1), but I aim to draw some general conclusions regarding the effectiveness of the current value added tax (VAT) treatment of charities, taking into account the boundaries set by European legislation. The central question in this paper is whether the current treatment of charities for VAT purposes is effective and efficient, given the objects of the exemptions for certain activities in the public interest and how this effectiveness could be improved.
Before addressing the exemptions, it is important to appreciate that various charities are not within the realm of VAT at all. Problems those charities encounter may be similar to problems encountered by charities whose activities are exempt, but the reasons are completely different. Changes to the VAT regime will not provide a solution for those charities as their problems are caused by the basic structure of VAT and therefore cannot to be solved within the VAT framework. Having thus made the distinction between charities within and outside VAT in paragraph 2, I will discuss in paragraph 3 why exemptions for certain activities in the public interest are included in the VAT Directive at all and I will examine whether the vague wording of some exemptions gives Member States the opportunity to interpret these exemptions in whatever way they like. In paragraph 4, I will highlight some general rules regarding the exemptions which limit the freedom of Member States, by analyzing the case law developed by the Court of Justice of the European Union (ECJ) over the years. These general rules stem from the objects of the exemptions and the basic VAT principles. In paragraph 5, I will establish the purpose of the exemptions as defined by the ECJ. Paragraph 6 examines whether these objects are achieved effectively and efficiently by the current exemptions. In paragraph 7, I will develop several alternatives to better achieve these objects and at the same time to mitigate the negative consequences of a VAT levy for charities which are not VAT taxable persons, as this would also improve the effectiveness of government policy regarding charities. In this paragraph I will also briefly pay attention to the study announced by the European Commission regarding exemptions in the public interest. Paragraph 8 concludes this paper.
Keywords: Value Added Tax, VAT, charities, exemptions, European Union
JEL Classification: H21, K34
Suggested Citation: Suggested Citation