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Concern for charities after CJEU University of Cambridge decision

Ruling could cost sector

Kieran Smith, Director, VAT
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Following referral from the UK courts, the Court of Justice of the EU (CJEU) has issued its decision in relation to whether the taxpayer could partially recover VAT on costs associated with income derived from externally managed investment funds.

The court decided in favour of HMRC and this could have an impact on the costs charities presently treat as partially recoverable.

Who does this affect?

This decision could potentially affect all charities that are required to apportion their input VAT. In particular, it could affect those charities that have used the principals as laid out in the UK courts’ decision in Church of England Children’s Society. Broadly speaking it concluded that costs associated with fundraising, which was ultimately used by the charity in relation to all of its business and non-business activities, could be partially recovered.

The issue

Cambridge had argued that the VAT incurred on the fund management costs were partially recoverable as overheads of the charity because the income derived from the fund was used to support all of Cambridge’s activities. The UK courts had previously ruled in favour of Cambridge allowing partial recovery. However, while the UK courts agreed with Cambridge’s argument, the CJEU has ruled in favour of HMRC and stated that VAT cannot be partially recovered on the costs for the following reasons.

  • The activity of investing funds that were donated to Cambridge was not an economic activity.
  • The investment management costs were not incorporated into the price of its goods and services but allowed it to reduce the price of those services.

There was no ‘direct and immediate link’ between the costs and a particular sale of goods and/or services.

What now?
This decision is clearly not good news for the sector in relation to VAT recovery of costs, especially for those charities that are partially recovering VAT on investment management fees in a similar way to Cambridge. Additionally, the decision also causes confusion with regard to the application of other previously settled case law such as Church of England Children’s Society. As a result, we would expect that HMRC will issue guidance to clarify its perceived position for the sector with regard to certain overhead costs following this decision. We will provide a further update and circulate the guidance as soon as it becomes available.

If you believe the Cambridge case affects your organisation’s recovery of VAT on costs please contact Robert Warne or Kieran Smith.

Contact us

Robert Warne
Rob Warne
Partner, Head of VAT and Customs Duty services