Joe Walsh (Cork South West, Fianna Fail)
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I thank the Minister of State at the Department of Foreign Affairs, Deputy Conor Lenihan, for attending to respond to this matter. We all know of the great work done by charities, specifically Irish charities whose work is recognised internationally. They must be supported and encouraged in their endeavours. One way the Government can do this is to support the call by the Irish charities tax reform group to remove the VAT burden on charities through the introduction of a VAT compensation scheme.

Charities are seeking compensation for the unreclaimable VAT they pay on expenditure. I do not buy the argument made by the Department of Finance that charities do not pay VAT on their services because while that is the case, they pay VAT on a range of other expenses to which I will refer later.

VAT compensation is a priority for several reasons, including the fact that it has been identified by charities as having a significant impact on their ability to undertake their work. The Department or Minister must not hide behind EU directives or regulations. The relevant EU Commissioner has stated that there is no impediment at EU level to such compensation being paid by EU member states.

The Danish Government has recently acknowledged that charities have a right to such compensation and is engaged with charities in finalising the practicalities of a compensation scheme. I ask the Department to adopt a similar approach and engage with charities here to identify ways in which it can be of assistance. I doubt much of the money which flows back into the Exchequer every time we give a few euro to charity is allocated to priority areas such as those in which charities are involved.

Charities pay VAT on fundraising efforts, promotion, essential equipment, professional fees, capital expenditure and necessary overheads in buildings and facilities. Unlike the business sector, charities cannot reclaim VAT they pay on this expenditure. The Minister for Finance has the power to relieve this VAT burden by compensating charities without contravening EU regulations, as was confirmed by Mr. László Kovács, the Commissioner for Taxation and Customs Union, when he stated:

The Commission has always considered that any scheme designed to relieve the VAT burden for charitable activities can be regarded as compatible with EU legislation if it is clearly separated from the VAT system... I have to underline that the decision to set up such a refund mechanism is strictly a national budgetary issue over which the Commission has no say or influence.

I ask the Minister for Finance to meet representatives of charities to devise a scheme to compensate for the VAT paid by charities. The requirement on charities to pay VAT has a human cost. For example, the €300,000 VAT bill paid annually by the Irish Cancer Society would run its entire cancer information service for a year, while the VAT bill paid by Concern last year was almost as high as its entire budget for Rwanda. Last year, the Missionaries of the Sacred Heart paid €55,000 in VAT, a sum that would feed, clothe and educate 153 AIDS orphans for a year and achieve a tremendous amount for impoverished people in underdeveloped and developing countries.

The current VAT regime as it affects charities is no more than a tax on initiative which has a major negative impact on the work of charities and the people they seek to help every day, while forming a minuscule portion of tax revenue for Government. In bringing this matter to the Minister for Finance in the strongest possible terms I urge him to initiate discussions with the charities to provide a VAT compensation in the next Finance Bill.

Conor Lenihan (Dublin South West, Fianna Fail)
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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.