Charities could lose millions of pounds in previously recoverable VAT after a decision by the Court of Justice of the European Community to back HM Revenue & Customs in a case against the University of Cambridge.
The case centred on an application by the university in 2009 to reclaim 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 case, which concluded this week, in effect decided that charities would no longer be able to recover a proportion of VAT incurred on investment costs, such as those on endowments or legacies.
HMRC allows charities to treat costs incurred on fundraising activities as overheads of their whole activities. This meant that the VAT on costs was recoverable.
But HMRC decided costs relating to the investment of funds should not be treated the same way and 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 rule.
The court’s decision to back HMRC is unable to be appealed because the court is the highest in UK law.
Graham Elliott, technical adviser to the Charity Tax Group, said in a commentary piece that the court’s decision "turns out to be one of the most unwelcome of all its decisions" and that the negative impact on charities could be considerable.
"It implies, fairly strongly, that the case for viewing costs of raising funding from donations to support charitable supplies is greatly weakened," he said.
In a statement, the accountancy firm MHA MacIntyre Hudson said the court’s decision to back HMRC was a "blow for charities" that was "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, said: "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."
A spokesman for HMRC said: "We are pleased with the court’s decision, which confirms our understanding of the rules."