Big setback for charities as European court decides Wellcome Trust must charge itself VAT

01 March 2021

The overriding purpose of the reverse charge is to ensure UK businesses pay VAT at the UK rate, irrespective of where they might buy those services from. However, the Trust is in general not ‘a business’ having only minor activities that require it to be registered for VAT in the UK. Therefore, Wellcome argued that it should not have to pay VAT using this mechanism. The European court disagreed.

The Wellcome Trust (the ‘Trust’), the fourth largest charity in the world, has suffered a disappointing blow in the Court of Justice of the European Union (the ‘CJEU’) resulting in a significant VAT burden for them and many other UK organisations purchasing services from abroad. 

The Trust, which makes significant grants for medical research, gains most of its income from its investments and legacies. The Trust is VAT registered by virtue of a number of comparatively minor activities, such as sales of catering and property rental, whilst their investments are managed by a number of investment managers located both within and outside the EU. During a previous case in 1996 the CJEU ruled that the charity’s investment activities were not an economic activity for VAT purposes, with the consequence that it was not entitled to recover VAT on the costs of management of its investments.

In 2016, the Trust then formed the view that it should not be liable to reverse charge VAT on the fund management services it received from abroad and submitted claims to HMRC to recover VAT of £13m if had previously accounted for. 

The Trust argued that it did not receive the supply where it was established, as per Art. 44 of the EU Principal VAT Directive because, despite being a taxable person for other activities, it was not ‘a taxable person acting as such’ when it received supplies related to its investments, which had been found not to be an economic activity for VAT purposes.

HMRC disputed this contention with parties ending up in the UK courts in 2018. The First Tier Tax Tribunal found in favour of the Trust, deciding that it should not be required to account for VAT on the services it receives from outside the EU. HMRC then appealed to the Upper Tribunal who, pre-Brexit, referred questions to the CJEU asking whether the Trust should be regarded as ‘taxable person acting as such’ for the purposes of Article 44. 

In its decision, the CJEU considered the phrase ‘a taxable person acting as such’ should be applied to organisations that are registered for VAT, irrespective of whether those costs were incurred for a non-taxable purpose. However, where an organisation is not registrable for VAT they would not be regarded as a taxable person, and they would not be required to self-charge UK VAT.

As the referral was made before the UK left the European Union, this decision, once ratified by the Upper Tribunal, will be binding on both the Trust and other organisations which do not undertake economic activities, many of whom have significant claims awaiting the outcome of the Trust’s appeal.