Although European law already allowed charities to use this recovery method, HMRC guidance had previously insisted that not-for-profit organisations pay a lump sum of VAT up front and recover payments later, effectively tying up vast sums of cash.
"The HMRC has backed down and said that people can use this recovery method as the norm, rather than the exception," said a spokeswoman for accountants PKF (UK) LLP.
"This will free a lot of capital for charities because now they won't pay any VAT up front - they will only pay it in dribs and drabs whenever they use the property for personal use."
However, PKF is pressing for the April 2003 cut-off point for back payments to be extended because many charities will lose out.
Meanwhile, the Treasury is to donate £2m to the Disasters Emergency Committee to match VAT collected on fundraising events and sales in support of the tsunami appeal. The Chancellor pledged to do this in January.
- See Finance extra, page 5.