Bad News for Charities Looking to Recover VAT on Investment Costs

Following the Court of Justice of the European Community’s (CJEU) recent decision to support HMRC’s view in its case against the University of Cambridge, Sue Rathmell, VAT Director at MHA MacIntyre Hudson, comments that charities need to move quickly to assess the impact on their finances.

“The decision of the CJEU in the case of The Chancellor, Masters and Scholars of the University of Cambridge v Revenue and Customs Commissioners (C-316/18) was unexpected and disappointing. The result is that charities will no longer be able to recover a proportion of the VAT they incur on costs relating to investment in funds (such as endowments or legacies).

“HMRC currently allows charities to treat costs incurred on fundraising activities as overheads of their whole activities meaning that the VAT on costs is recoverable at the charity’s overhead recovery rate. However HMRC have never accepted that the same can be said of costs relating to the investment of funds and challenged the University of Cambridge over the issue in the UK courts. The issue was referred to the CJEU in April 2018.

“The CJEU’s decision is a blow for charities. It is likely to conclude the argument about whether VAT recovery should depend on the overall purpose of expenditure or whether VAT recovery depends on the nature of the activity which immediately incurs the costs.”

Sudhir Singh, Partner and Head of the Not for Profit sector at MHA MacIntyre Hudson added: “No doubt there will be discussions around the intricacies of the judgment over the coming weeks and about whether this judgment affects the VAT recovery currently enjoyed by charities on fundraising activities. Any change in HMRC policy in this area could cost charities and other not for profit organisations millions. Affected organisations need to review the extent of their VAT recovery on investment and fundraising costs to determine if they need to make adjustments.”