If VAT Were Charged at 20% – And What Charities Could Do About It

There have been rumours in the media for a while that certainly the Conservative Party were considering a VAT increase should they win the election in the spring. But, according to an article in The Times , the Labour Party too is now contemplating a similar move. This cannot be much of a surprise: Even at the current rate of 17.5% our sales tax is well below the European average of 20%. Moreover, with a budget deficit of £178bln to tackle, the suggested hike is expected to raise an extra £13bln income for the Treasury.

The impact of higher VAT on consumer prices has also been highlighted by the latest inflation rate published by the Bank of England this morning: The Consumer Price Index (CPI) rose to 3.5% for January 2010, the highest rate in 14 months, on the back of the increase in VAT from 15% to 17.5% and higher petrol prices.

A further hike of the VAT charged will severely affect in particular Charities and educational establishments who cannot reclaim VAT on supplies, and hence for which an increase of VAT could mean a net cost increase of over 2%. Moreover, although this is currently being denied by the Chancellor Alistair Darling, it cannot be excluded that a number of supplies which currently benefit from a full or partial exemption of VAT could at some stage face reviews of their status. Among these are, for example, food, disabled equipment and vehicles.

Obviously, a VAT increase will also result in higher household bills for individuals, which, in the current economic low-growth environment, could lead to a further reduction in benevolent donations, putting additional strain on the third sector. As far as the educational sector is concerned, a recent study referred to by The Times found that 85% of independent schools in the South of England were looking to set-up contingency plans to cope with reduced fee income over the next two to three years.

This makes thorough and ongoing price monitoring mechanisms even more important. While commercial organisations may have their own in-house experts at least for some of the key spends (i.e. raw materials), not-for-profit organisations and schools often use buying groups and consortia instead. While these offer good overall discounts, their approach does not take into account each organisation’s individual needs. Also, while they allow a Charity to measure value for money against its peers, this does not necessarily constitute best value as far as the wider marketplace is concerned.

Let me explain: Buying groups typically negotiate a blanket discount or specific tariff with a select group of service providers and suppliers. While this practice will ensure that some level of discount – and thus savings – is achieved, the pricing offered will not take into account each client’s individual purchasing profiles and needs. This can only be achieved with an in-depth, bespoke analysis of each organisation’s own purchases. This detailed profile allows a supplier a much better forecast of a client’s future profitability for his business – and as a result much more competitive pricing, customised to the product and service mix typical to each client.

Expense Reduction Analysts’ category experts can ensure that any organisation will receive best value for money at all times not only in comparison with its peer group, but also as far as the wider marketplace is concerned. Furthermore, we do all the work and our clients only share with us actual savings made over the period of our engagement. If we can’t improve the current prices, there won’t be a charge. And while any savings we find will free-up funds to be reinvested into a Charity’s own services, such savings will also reduce the cost of VAT due payable.

In the meantime, however, there are also a number of steps any organisation can take internally towards procurement best practice. For these please refer to my previous blog here.