The case centred on an Aberdeenshire farmer, Frank Smart, who claimed he should not have paid VAT on a £7.7m transaction to buy more than 34,000 units of land as part of an EU farm subsidy scheme.
In its ruling, the Supreme Court sided with Smart over HMRC and decided that the VAT paid by Smart should be recoverable.
The decision partially contradicts a recent court case involving the University of Cambridge, which some experts thought could have widespread ramifications for the charity sector.
In early July, the Court of Justice of the European Union sided with HMRC in a case against the University of Cambridge in respect of a VAT recovery claim on an investment fund made up of donations and endowments.
HMRC allowed charities to treat costs incurred on fundraising activities as overheads of their whole activities, meaning that the VAT on costs was recoverable, but HMRC decided that costs relating to the investment of funds should not be treated the same way.
The Cambridge case in effect decided that charities would no longer be able to recover a proportion of VAT incurred on investment costs, such as those on endowments or legacies.
Experts claimed the CJEU’s ruling could cost the charity sector millions in previously recoverable VAT.
Smart was advised by the accountancy and tax firm MHA MacIntyre Hudson during his case, and the firm’s VAT director, Glyn Edwards, said the case was a "significant development" in the VAT landscape.
"After the decision of the Court of Justice in the University of Cambridge case, it was widely anticipated that HMRC would use it to reduce the rights of charities to reclaim VAT on fundraising activities," he said.
"But the Supreme Court in Frank Smart makes it clear that Cambridge is a special case decided on its own facts and should not be considered to apply widely to all fundraising scenarios."
He said that since 2005 HMRC had accepted that VAT was potentially deductible on fundraisers’ fees and on the recovery of any VAT incurred in securing donations or legacies to support the work of a charity.
Edwards said it was widely anticipated that HMRC would change its views on these rights post-Cambridge, and that it might still try to do so, but the Smart case had suggested the impact of the Cambridge case might be less widespread than first feared.
"Potentially even more useful is the idea, from the Supreme Court, that fundraising that involves the making of exempt supplies should be treated in the same way as fundraising that involves making no supplies at all," Edwards said.
"There might now be an argument that a charity should look downstream from the event itself and might be able to reclaim VAT to the extent that the funds raised support taxable business activities."