High Court VAT decision boosts charity coffers

Charities will be able to claim back tens of millions of pounds of VAT following a landmark ruling at the High Court last week.

A successful appeal by the Children's Society means that much of the tax lost on fundraising costs can now be recovered.

The Children's Society itself will save about £500,000 immediately, but experts are predicting that nearly every charity in the UK will be able to recover more VAT as a result of the decision.

"The Children's Society has led the fight to make sure money donated to charities is not skimmed off in VAT," said the society's corporate services director, Charles Nall. "It's marvellous news for charities across the whole of the UK and the people that support them."

The ruling by Mr Justice Blackburne means any VAT incurred on fundraising for unrestricted funds - those not earmarked for a set purpose - can now be partially reclaimed. The amount that charities can recover should depend on the proportion of their total activities deemed taxable, such as sales and training. However, the judge referred a final decision on the "level of apportionment" to a VAT tribunal.

The ruling followed an appeal by the Children's Society against a VAT tribunal decision in June 2004 on the tax incurred in the recruitment of donors. But the ramifications of last week's ruling are far wider because it took into account a judgement in the European Court in May, which said all fundraising costs are eligible for VAT reclaims.

This means that VAT on all forms of fundraising, including face-to-face, direct mail, marketing and legacies, can now be recovered.

Russell Moore, VAT partner with accountants Saffery Champness, which advised the Children's Society on the case, said: "It's difficult to predict precisely how much this will be worth to the sector. But the additional saving will certainly be tens of millions a year, and could be more.

"Just about every charity in the country will be able to recover more VAT as a result of this decision.

"Although estimates have varied in the past, we believe the actual amount of irrecoverable VAT paid by the voluntary sector each year could be as much as £1bn, so today's ruling is very significant indeed."

He added that charities would be able to submit retrospective claims going back three years.

HM Revenue & Customs, which has contested the case with the Children's Society for the past four years, said it intended to "study the decision closely and consider its implications carefully" before deciding whether to appeal against it.

But Helen Donoghue, director of the Charities' Tax Reform Group, urged HMRC to accept the ruling "as part of the potential solution to the sector's underlying VAT problems".

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