Irish Charities Tax Reform Group says failure to qualify for VAT refunds places a significant financial burden on these organisations, writes Deirdre Mortell.

The greatest tax burden faced by charities in Ireland is their VAT bill. This is a surprise to many people. It is often a particular surprise to all those people across Ireland who generously give their time and money to good causes.

Most of us assume that charities are treated in the same way as business and that they can reclaim VAT regularly. This is not the case.

Currently, most charitable activity is treated as "exempt" for VAT purposes under EU VAT law - their activities are considered outside the scope of VAT. In reality, this means that because charities don't charge VAT on their outputs, for example services, they cannot reclaim the VAT they pay on inputs, e.g. building costs, recruitment costs or anything else.

This places a very significant financial burden on Irish charities and voluntary groups and particularly on those charities that raise most of their income from public fundraising. Not only do they have to raise the costs of providing the goods or services for their clients, but they also have to raise the VAT cost on top of that - typically an extra 21 per cent.

The Irish Charities Tax Reform Group, a coalition of 100 charities and voluntary groups, has been campaigning for more than 10 years to have this situation addressed by Government. Based on a limited survey in 1999, it estimated the VAT burden on Irish charities at €63 million. This would run the Society of St Vincent de Paul for three years.

In the run up to the recent general election, the group organised a Web-based campaign www.vatcampaign.com. The public was invited to sign a petition and e-mail their local candidates seeking support for the introduction of a VAT refund mechanism for charities.

In the space of three weeks almost 13,000 people logged on and signed up and 26,000 e-mails were sent to candidates on the issue. Clearly there is strong public support for addressing the problem of VAT for charities.

The EU parliament recently demonstrated its support for reform of the VAT regime as it applies to charities in its response to the Commission's document Tax Policy in the EU - Priorities for the Years Ahead - which includes a section as follows: "[The European Parliament] ... calls on the Commission to introduce in the VAT rules either an exemption with a refund scheme, a mandatory reimbursement of VAT or a super-reduced rate (applied to outputs in order to allow full recovery of input tax) for charities."

The Minister for Finance, Mr McCreevy, argues that he is precluded by EU VAT law (sixth EU VAT directive) from refunding VAT to charities here.

The Irish Charities Tax Reform Group disputes this. It acknowledges that the State must collect VAT from charities and other voluntary groups, but argues that the Government through the Minister for Finance, has the power to then re-pay the VAT to the charities, as long as the repayments are "outside the scope of VAT".

Indeed, previous Ministers for Finance have introduced VAT refund orders in specific circumstances, e.g. certain goods for exclusive use of people with a disability.

The Irish Charities Tax Reform Group's preference is for a refund mechanism. as this leaves control with the national authorities (in our case the Revenue Commissioners) as to which charities qualify for the refund.

So long as the total national VAT take is not affected, the EU doesn't mind what individual governments do with the VAT they collect. Therefore, it is possible to introduce a VAT refund grant scheme for charities without falling foul of the EU.

Our 11th annual conference will once again highlight the issue under the heading "VAT - uncharitable taking". More than 100 charities will be represented, with the keynote address given by EU Commissioner Mr David Byrne, who has been asked to clarify the EU position on the introduction of a VAT refund mechanism for charities in Ireland. The guest speaker Ms Kathy Sinnott has also added her voice to our campaign.

The Irish Charities Tax Reform Group calls on Mr McCreevy, a champion in the area of tax relief on charitable donations, to put in place a VAT-refund mechanism for charities.

Deirdre Mortell is chairwoman of the Irish Charities Tax Reform Group and director of fundraising and communications with Barnardos (for details www.charitytaxreform.com and www.vatcampaign.com)