Finance: Tax ruling could boost charities

Charities and other not-for-profit organisations could recover significant amounts of lost VAT following a series of legal challenges.

HM Revenue & Customs is imminently expected to lose a second court case in four months on the issue of a time cap imposed on recovering VAT incurred before 1997.

It has already lodged an appeal with the House of Lords, and the issue could eventually go the European Court of Justice.

The cases, brought by two private sector organisations, hinge on whether a transitional period in which taxpayers could recover previously unclaimed input tax, before the introduction of a three-year cap in July 1996, was sufficiently long.

Should HMRC lose, taxpayers that have not been able to recover their full entitlement of input VAT before 1997 will be able to submit claims.

A business brief setting out the position of HMRC is expected shortly.

Russell Moore, charity VAT partner at accountants Saffery Champness, said that although the case had been brought by businesses, the main beneficiary would be the charity sector.

"This could represent an opportunity for charities that believed they could not recover VAT historically," he said. "This could arise where the liability of an activity has recently been clarified, such as membership subscriptions, or where VAT on fundraising costs has now become partially recoverable following last year's Children's Society case.

"It is likely that HMRC will make repayments but, should it succeed in the European Court of Justice, it might then seek a clawback."

Victory for the Children's Society, in a case that concluded in August last year, meant that VAT incurred on fundraising for unrestricted funds could be partially reclaimed. But charities were able to submit claims going back only three years. Should HMRC lose, charities could also be able to claim for years before 1997.

The claimant in the second case is Conde Nast, the publisher of Vanity Fair, which in 2005 lost a major libel battle with film director Roman Polanski.

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