The victorious appeal by the Children's Society netted the charity about £500,000, but there were hopes that the sector could itself be tens of millions of pounds a year better off if the decision was allowed to stand.
A statement issued last week read: "HMRC has decided not to appeal further. We will shortly issue a business brief to explain the High Court's decision and to provide guidance for those charities that wish to make back claims as a result."
Campaigners welcomed the announcement but reserved any final judgment pending the detailed guidance from HMRC on how charities will be affected.
Charles Nall, corporate services director at the Children's Society, said: "We are delighted HMRC has decided not to appeal. This is a good day for the sector, and a start to a reduction in the irrecoverable VAT it suffers.
It is to be hoped that HMRC accepts the decision in good faith and does not attempt to undermine the benefit of increased VAT recovery that will result."
Helen Donoghue, director of the Charities' Tax Reform Group, hailed the announcement as a "very positive first step on the road to dealing with the horrible VAT issue".
But she added: "We will be looking closely at how it's going to affect the rest of the sector. The interpretation that HMRC puts on the decision should be as favourable as possible for the sector - it must not try to limit the scope of the ruling."
It is still possible for HMRC to nullify the effect of the High Court judgement by changing the law or imposing difficult conditions on recovering VAT.