One of the founding principles of the VAT system is that VAT incurred on costs should be reclaimed, provided it can be linked to a transaction which affords a right to VAT recovery. But how strong does this link have to be? Numerous cases have considered this point, but for many the answer is no clearer.
What are the key decisions?
University of Cambridge
In the UoC case, the CJEU decided that it objectively viewed the costs on which deduction is sought must be incorporated into an immediate or subsequent output (a downstream economic activity).
The court decided that the funds raised from its investments did relate to a downstream activity. However, as the funds raised reduced prices for all of the charity’s activities, the costs could not therefore be incorporated into an economic activity so no right of a deduction arose.
In the case of Frank Smart, the taxpayer was able to demonstrate that professional costs relating to the purchase of Farm Payments related to the immediate out of scope fundraising and the downstream intended taxable farming activity. They were therefore a general overhead of a fully taxable business.
What are the takeaways?
The issue for charities is therefore different to commercial bodies which seek to raise funds. A charity’s objectives may be to raise funds to support its charitable activities. However, this will not give it a right of deduction on fund raising costs.
In order for the costs to be a general overhead, the charity will need to demonstrate, on the basis of evidence, the raising of funds by donations or investments will be used in part to generate new economic activity or to stimulate existing economic activity. This may well conflict with their objectives.
We expect to see charities being challenged on costs relating to fundraising/investments in the future. Documenting the purpose of the fundraising will be important. Even if the new economic activity does not take place for several years (Sveda) the costs will be a general overhead.