Use the VAT Compensation Scheme to save the scheme

Mar 26, 2021

When the VAT Compensation Scheme was introduced in 2018, there were concerns that it wouldn't be used. These concerns proved to be unfounded, but now that the scheme has run its course, what can charities do to renew and refresh it?

The VAT Compensation Scheme, which aims to reduce the VAT burden and partially compensate for VAT paid by charities, commenced from 1 January 2018 with a three-year pilot period to 31 December 2020.

When the scheme was initially launched, it was with a degree of uncertainty. Would charities apply in significant numbers? Was a €5 million cap the right amount? Would the scheme be accessible enough?

The results of the scheme speak for themselves, however. The scheme was significantly oversubscribed in 2018 and 2019, and the €5 million cap is not enough to meet the demand. Over 900 VAT claims, totalling €49 million, were made for 2019 and over 1,100 claims, totalling almost €40 million, were made for 2018.

While the scheme has only been in operation for a few years, the charities sector campaigned for a VAT reclaim initiative for over 20 years. Now that we have it, we are very anxious that we hold onto this important support for the sector.

Charities Institute Ireland (Cii) and the Wheel have entered a period of consultation with Revenue and the Department of Finance to review how the scheme has operated over the last few years and how it can be improved and enhanced. Our goal is to ensure that the scheme is retained and to have the €5 million cap increased substantially. Therefore, the 2020 return, claims of which are currently being submitted, is more important than ever.

One critical factor for the Department of Finance in considering the scheme’s renewal is to ensure that it is not overly burdensome from an administrative perspective. While many charities have no problems with the operation of the scheme, some issues appear to be recurring, and administrative improvements could help charities to ensure their claim is correct.

Calculation of qualifying income

The scheme allows charities to claim a refund of a proportion of their eligible VAT costs based on their level of non-public funding. However, some charities incorrectly include public funding in their calculation of qualifying income, which can lead to delays in the processes of claims. Revenue has published guidance, Charities VAT Compensation Scheme, which is regularly updated. The section that is most relevant to ensuring that a claim is correct is set out under section 5.1, which provides a comprehensive note on qualifying income.

Claims deadline

Another point to highlight is the importance of submitting claims on time. Claims can only be submitted between 1 January and 30 June each year, so it is advisable to get VAT compensation claims submitted well in advance of the 30 June deadline. In 2020, the claim deadline was extended to 31 August, but there will not be an extension this year. Keep in mind that the 30 June date is not a target and leaving a submission to the last minute can give rise to avoidable errors and issues with Revenue Online Service, which may lead to claims not being successfully uploaded on time.

Finally, we also understand that for some, there is a cost-benefit analysis taking place at the moment as charities only received approximately 12% of their claim last year and 13%  the previous year, due to refunds being paid on a pro-rata basis as the value of claims exceeded the annual fund cap. The sector fought for many years for this initiative, and we will do our utmost to raise the €5 million fund to make it a more attractive proposition for the charity sector  – we would encourage as many of you to apply as possible to demonstrate to the Department of Finance the need and demand for the scheme.

The Wheel has developed a very practical template to assist charities calculate their claim correctly first time. Please use and share this resource with your charity contacts.

Tony Ward is the Director of Finance at The Wheel.