Charities should consider whether their current VAT recovery methods (i.e. both for the business element and the partial exemption calculation) provide an appropriate level of VAT recovery. A combined method may be simpler to calculate but the overall recovery amount should be calculated and compared with existing methods before submitting a method for approval.

For further information see HMRC’s VAT Partial Exemption Toolkit.

The decision of the CJEU in Kretztechnik AG v Finanzamt Linz [2005] EUECJ C-465/03 (26 May 2005) was followed by the High Court when deciding for the charity in Church of England Children’s Society v Customs and Excise Commissioners [2005] EWHC 1692 (Ch) (29 July 2005) and provided an opportunity for charities to obtain partial VAT recovery on  costs of fundraising services.

The result of Church of England Children’s Society is that VAT incurred on costs of generating donations is not necessarily directly attributable to non-business activities; instead, the charity can attribute the cost to the activity that the donations will support. If these are generally supporting the overall work of the charity this means the VAT incurred can be partially recoverable. This will not apply where the donations are restricted for charitable non-business use – see HMRC Business Brief 19/05 for further details.

In most cases however the VAT incurred on fundraising services can be treated as “residual pot” on the basis that such income is available for use on any of the Charity’s activities (and therefore it is often not practical to determine the precise use to which the income is put).  In principle, therefore, the VAT incurred on costs is recoverable in accordance with the business/non-business apportionment and/or partial exemption method in place.

Following the Children’s Society case, HMRC had been accepting claims for partial recovery of input tax on investment management fees as well as general fundraising costs attaching to raising of voluntary income. That decision followed a considerable period of uncertainty on the point, with conflicting treatment by different control officers around the country; and the position was only resolved after a meeting between CTG and HMRC Charity Branch.

HMRC agreed to publish a Business Brief in this respect; however CTG was subsequently informed that HMRC would be challenging the treatment of fund management fees as recoverable by charities as “residual pot”. HMRC’s reasoning is that raising funds by investing in stocks and shares is somehow different to doing so by seeking donations. CTG has previously pointed out that both are outside the scope activities of the charity which have a wider purpose: raising unrestricted funds which the charity can use to further its objectives. Additionally, both involve the purchase of taxable services from outside the charity (from fundraisers and fund managers).

CTG has argued that if the one is residual and open to the “look-through” principle to the wider activities of the charity then the other must be also. The Partial Exemption Branch did not, however, agree and the matter is currently under appeal – Chancellor, Masters and Scholars of the University of Cambridge v Revenue and Customs Commissioners.

The University of Cambridge won its case in this respect at the First Tier Tribunal, which was subsequently appealed by HMRC to the Upper Tier Tribunal, where the University of Cambridge was also successful. The Court of Appeal referred to the case to the CJEU, which has recently found in favour of HMRC – a commentary on the CJEU decision can be found here.

HMRC has said that there can be no Business Brief until the conclusion of the litigation and that the dispute is resolved one way or the other. We therefore await HMRC’s next steps.