Charities should be able to reclaim VAT on investment management fees, a tribunal has ruled, in a move which is likely to mean tens of millions of pounds of additional cash for the sector.

Charities pay fees to the managers of their investments, and those fees include VAT. For a number of years charities have been in dispute with HMRC about whether they can reclaim some of those fees.

VAT can usually be reclaimed on a purchase of goods or services if those purchases are then used to carry out a business activity in which VAT is charged to an end customer, usually a member of the public.

Charities typically cannot reclaim all the VAT they pay on services they buy in because many of their activities are non-business – they do not charge people for providing them – or because they are exempt from VAT. Health services and education, for example, are exempt from VAT, meaning the charity does not charge VAT to its users.

Typically, charities are allowed to reclaim the portion of their VAT which relates to their business activity. This calculation is different for each charity.

The case before the tribunal involved the Cambridge University Endowment Fund, which invests money and spends it to support all the university’s activities.

Investing money is a non-business activity. However CUEF argued that it could reclaim some of the VAT it paid because it supported all the university’s activities, some of which were business activities.

CUEF received a judgment in its favour at a First Tier Tribunal in 2013, but HMRC appealed to the Upper Tier Tribunal. The tribunal agreed with this point of view.

The decision is likely to have significant implications for the sector because charities currently have around £100bn of assets under management with investment managers. Charity VAT experts say that the cost of VAT on the management fees for this money is very difficult to estimate, but is likely to be well over £100m a year.

Charities will not be able to reclaim all of these fees, but they will be able to reclaim a significant proportion, going back four years – further for charities which had put in a “protective” claim to HMRC when a dispute started.

Socrates Socratous, director of Soc VAT Consultants, a specialist in charity VAT issues, said he had advised charities to put in claims several years ago.

“But any charity with investment management costs should consider putting in a claim as soon as possible to maximise their potential repayment,” he said.