VAT U-turn 'good news for sector'

An HM Revenue & Customs decision to allow charities to reclaim a proportion of VAT costs on their investment managers' fees could result in savings and retrospective claims worth tens of millions of pounds for the sector, tax experts have predicted.

"This is a major opportunity for charities to seek a substantial windfall," said Russell Moore, VAT partner at accounting firm Saffery Champness. "Claims could total several millions of pounds."

Charities can already reclaim VAT on fundraising costs for unrestricted income, following a legal challenge brought by the Children's Society in 2005. This week's announcement means that this will be extended to cover investment management or advice. The claims could potentially be made on costs incurred as far back as 1973, when VAT was first introduced.

The extension of the principle to VAT on financial advice represents an apparent U-turn by HMRC: the NSPCC and the Wellcome Trust lost cases to reclaim VAT on finance management costs in 1992 and 1996 respectively.

"This is a very welcome decision," said Helen Donoghue, director of the Charity Tax Group. "It should benefit more charities than were originally helped by the decision in the Children's Society case."

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