The European Court has supported HMRC’s submission that VAT incurred by the University of Cambridge on the management of an investment fund is wholly irrecoverable. This decision follows a referral from the UK courts.
Previous decisions, which HMRC had historically accepted, relating to the generation of additional funds through investment and fundraising have taken the view that if the costs generate funds to support a charity’s economic activity in general the costs can be attributed to all activities of the charity and can be treated as an overhead for the purposes of VAT recovery. The VAT is then recoverable on the basis of the charity’s business/non-business and partial exemption method.
In the University of Cambridge case, the European Court has determined that the costs incurred must be a component of the onward taxable business transaction in order to give a right to reclaim the VAT incurred. The management of donations and endowments are not incorporated into a particular income transaction and no right of deduction therefore arises.
This contrasts with a 2005 decision in respect of Church of England Children’s Society where it was confirmed costs relating to funds raised to support taxable business activities were wholly recoverable and the VAT on costs relating to funds raised which relate to all activities of the charity can be recovered on a fair and reasonable basis which normally requires an apportionment method to reflect the taxable business use.
The European Court has now said costs incurred by the University of Cambridge cannot be components of an onward taxable sale because funds raised allow the charity to subsidise business activities and cannot, therefore, be components of the business income of the charity. This is a more restrictive interpretation than that previously accepted by HMRC and it remains to be seen whether HMRC will attempt to restrict further a charity’s VAT recovery on fundraising costs.
In the circumstances, charities should review their position and ensure they are applying any input VAT apportionment method in accordance with their agreed business/non-business/partial exemption method.