Experts have warned that a recent court ruling could force charities to pay millions of pounds more a year in tax if it leads to change in approach from HMRC.
On Wednesday, the Court of Justice of the European Union (CJEU) ruled in favour of HM Revenue & Customs, which had argued that the University of Cambridge should not be able to recover some £182,501 of VAT it had paid on investment management fees.
This decision is likely to have a direct impact on charities with large investment portfolios as it means they will no longer be able to recover VAT on their own investment management fees.
However, experts have warned that the impact could be wider as it may lead to HMRC reassessing its position on charities’ ability to recover VAT on fundraising costs generally.
Sudhir Singh, partner and head of the not-for-profit sector at MHA MacIntyre Hudson, warned that such a change in HMRC policy in this area “could cost charities and other not-for-profit organisations millions”.
Civil Society News asked HMRC whether it would now begin to challenge charities that reclaim VAT on wider fundraising costs but the regulator declined to comment on that issue.
An HMRC spokesperson said: “We are pleased with the court’s decision which confirms our understanding of the rules.”
‘Unexpected and disappointing’
Graham Elliott, technical adviser to the Charity Tax Group, said the CJEU ruling was “one of the most unwelcome of all its decisions, and the negative impact on charities could become considerable”.
He said the decision “creates a pretty considerable mess that will take some time to unravel”.
Meanwhile, Sue Rathmell, VAT director at MHA MacIntyre Hudson, said CJEU’s decision was “unexpected and disappointing”.
“HMRC currently allows charities to treat costs incurred on fundraising activities as overheads of their whole activities meaning that the VAT on costs is recoverable at the charity’s overhead recovery rate.
“However HMRC have never accepted that the same can be said of costs relating to the investment of funds and challenged the University of Cambridge over the issue in the UK courts.
“The CJEU’s decision is a blow for charities. It is likely to conclude the argument about whether VAT recovery should depend on the overall purpose of expenditure or whether VAT recovery depends on the nature of the activity which immediately incurs the costs.”