Conor Lenihan (Dublin South West, Fianna Fail)

As the Minister of State with responsibility for Irish aid and human rights, I am impressed by the arguments the former Minister, Deputy Walsh, has marshalled on this topic. The Minister for Finance is sympathetic to his point of view and I urge the Deputy to discuss these matters with him at the earliest possible date because he will find the Minister to be receptive.

I am pleased to take this opportunity to clarify matters relating to the VAT treatment of charities. 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 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, medical equipment donated voluntarily to hospitals, equipment and buildings used by water rescue organisations and humanitarian goods for export. These orders are focused and designed to target specific circumstances. However, under EU law, it is no longer possible to introduce new schemes within the Value-Added Tax Act 1972 to relieve charities from the obligation to pay VAT on goods and services they purchase. Further, 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 rather than the category of customer. It would not be possible, therefore, 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, which has 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 they have incurred, provided state aid rules are observed. Given that Exchequer funding is made available to very many charitable organisations, this is in effect happening.

The tax code 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. Charities also benefit significantly from the uniform scheme of tax relief for donations introduced in the Finance Act 2001 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.

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