A recent VAT Tribunal decision has called into question HMRC's policy on VAT recovery by charities and other not- for-profit organisations on costs associated with their investment activities.
The decision could allow VAT registered organisations to make retrospective claims, in addition to recovering VAT on future investment costs.
The case was taken by the University of Cambridge against a decision by HMRC to refuse VAT recovery on fees relating to the management of its investments. HMRC had denied recovery on the grounds that the university's endowment fund investment activity was a non-economic activity.
However, the First-tier Tax Tribunal accepted the university's arguments that although the operation of the investment fund is not an economic activity in its own right, the fund operates in order to generate monies to support the university's wider range of economic activities, some of which were eligible for VAT recovery.
The Tribunal decided that the costs of operating the fund should be regarded as an overhead of the university and VAT recovery allowed to the extent that it supported the university's taxable economic activities. Such activities included, for example, consultancy and commercial research.
The decision in this case has potential VAT recovery implications for other universities, schools, charities and not-for-profit organisations that have VATable activities and investment activities, but do not claim VAT recovery on those investment activities.
We understand that HMRC may appeal this decision, so there may be some time before a definitive position is reached. In the meantime, if you have incurred irrecoverable VAT on similar costs, you should consider making a protective claim to HMRC as soon as possible for VAT incurred in VAT years which started in the last five years. If a protective claim is not made, retrospective recovery may be lost under the four-year capping rules if the final outcome is in favour of the taxpayer.
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