The Wellcome Trust has avoided a £13m VAT bill after a court ruled that the tax should not be charged on the charity’s payment of management fees to investment managers outside the EU.
The charity had previously been prevented from recovering VAT on “non-business activities” such as the buying and selling of shares by the courts due to an application of a “reverse charge”.
The reverse charge is the amount of VAT that would have been paid on a service if it had been bought in the UK.
HM Revenue and Customs had considered that the Wellcome Trust was eligible to pay £13m in VAT through the reverse charge, but the charity argued that the “place of supply” of the management services it was paying for was outside of the UK so not eligible for the tax.
The First Tier Tribunal ruled that the charity is not required to account for the VAT on the investment management services it receives from outside the EU under the reverse charge procedure.
A Charity Tax Group (CTG) spokesman welcomed the decision, which he said would "preserve significant resources for the charity sector".
He said: "We recognise that the decision may have limited value for other charities but we hope that it will set a useful precedent for charities that find themselves in similar circumstances to Wellcome.”
Meanwhile, Steve Hodgetts, VAT partner at RSM, said the case suggested that other charities might be paying too much for similar services.
He said: “The case raises a very interesting point highlighting the ambiguous nature of some the language in the VAT Directive which had been interpreted differently. Despite the tribunal decision the case will almost certainly be appealed due to the amounts involved.
“However, charities who are accounting for VAT under the reverse charge provisions should consider their position further and if necessary make protective claims to HMRC for any VAT overpaid.”