Alongside the direct impact on charities that have substantial investment portfolios, there may also be a wider impact on the ability to reclaim VAT on fundraising costs generally.
The University of Cambridge made a claim in 2009 for VAT incurred between 1973 and 1997 and from 2006 to 2009 on the fees for managing an investment fund made up of donations to the University and endowments.
The University had argued that VAT incurred on its investment management fees should be partly recoverable on the basis that the income generated from the funds is used to finance the whole of its activities, which were a mix of taxable and exempt supplies. HMRC argued that the investment management costs were directly referable to the non-business investment activity alone, and also that the costs were not a ‘cost component’ of the downstream business supplies. HMRC challenged the University of Cambridge over the issue in the UK courts before the case was referred to the CJEU in April last year.
The CJEU decided to back HMRC’s interpretation of the issue.
What does this mean?
The case will have a significant direct impact on charities that are registered for VAT which have large investment portfolios, and have been deducting VAT on investment management costs. HMRC can be expected to assess charities that have made claims for a proportion of the VAT on such fees and to enforce any protective assessments that may have already been issued. If no communication is received from HMRC, it may be necessary to consider making a disclosure to correct past claims.
There may also be a wider impact on fundraising costs generally.
Since the UK decision in Church of England Children’s Society, it has been assumed that VAT on such costs is an overhead of the general activities of the charity, as long as the funds raised are used to support the making of taxable supplies. In such circumstances, HMRC allowed charities to treat costs incurred on fundraising activities as overheads of their whole activities. This means that the VAT on costs was partly recoverable. The Cambridge case implies that the case for deducting VAT on the costs of raising funds such as seeking donations, grants, and bequests to support charitable supplies, is now weaker.
We will need to wait for HMRC’s views on this wider aspect of the decision. It is hoped that they will not seek retrospective adjustments given their previous guidance, but clearly some clarity is needed following this decision and an early announcement setting out HMRC’s policy together with guidance on any adjustments required would be welcomed.
In the meantime, please contact us if this decision affects your organisation or if you would like to discuss its implications.