Revenue objection could see VAT refunds slashed

A massive VAT windfall for the charity sector could be cut in half because of objections by HM Revenue & Customs.

The Children's Society won a landmark court case last August that paved the way for it to recover large amounts of VAT on fundraising costs.

The sector anticipated the return of tens of millions of pounds in tax, with some charities putting in claims of £20m each.

But after stalling for nine months on repayments, HMRC has said that charities are entitled to recover VAT incurred on fundraising costs, but it does not accept that fundraising should be classed an "overhead" when calculating a charity's overall VAT "recovery percentage".

This means that the percentage will be much lower than had been hoped.

Russell Moore, VAT partner with Saffery Champness, which advised the Children's Society, said HMRC's position meant that, although some charities would get full VAT recovery, others would get only half of what they had expected.

"This is an issue we are going back to court on," Moore told Third Sector.

"It is so disappointing that charities are having to fight tooth and nail to get what we believe the court has already decided."

Following a series of meetings between the Charities' Tax Reform Group and HMRC, the first set of repayments to charities has just been made.

But charities expected more and have applied for an appeal. The case is expected to be heard within three months.

"HMRC has been very difficult in terms of accepting principles arising from the case," said Moore. "But it's still a massive windfall. The overall benefit retrospectively and in future will be very considerable."

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