Charities set to lose VAT recovery on investment costs

05 July 2019

A judgment from the Court of Justice of the European Union (CJEU) is expected to end charities’ entitlement to recover VAT on the costs of managing their investment funds.  Not for profit organisations should take action now to review the impact on their VAT recovery position.


In 2005, the UK High Court decided in a case brought by The Church of England Children’s Society that VAT incurred by charities on fundraising costs was recoverable as an overhead cost. Therefore, charities were entitled to recover a proportion of the VAT incurred, according to their business/ non-business and partial exemption methods.

HMRC initially accepted that this principle also applied to fund management costs, such as investment management fees, provided that the purpose was to raise general funds used to further the objects of the charity and that its buying and selling of securities did not constitute a business activity. However, HMRC later changed its view and began to deny charities’ VAT recovery on investment costs.

An appeal was brought by the University of Cambridge to challenge HMRC’s position, following success in the First Tier tribunal and again at the Upper Tier for the University, the Court of Appeal referred the question of VAT recovery to the CJEU. A number of similar appeals by other charities have been stood over behind that lead case.

The University of Cambridge judgment

The CJEU has found that investment management costs of a charity are not an overhead cost – instead they are wholly attributable to a non-business activity of raising the funds held in these investments, meaning that the VAT incurred cannot be recovered at all. The decision may also have wider implications for charities’ VAT recovery position.

Despite Brexit, the CJEU’s judgment has arrived before the UK’s departure from the EU and directly concerns an appeal being contested by HMRC in the UK courts. Therefore HMRC can be expected to apply the European court’s findings in the UK.  

How should charities respond?

HMRC has not yet made a statement on the University of Cambridge judgment but is, at some point, likely to amend its previous guidance and formally confirm its view that VAT cannot be recovered on charities’ investment costs. In the meantime, charities should consider the following action points:

  • Does your charity incur and recover VAT on the cost of managing an investment fund? If so, you should quantify the amounts claimed and consider the impact of losing this input tax recovery.
  • If you have made a claim for VAT on investment costs that is currently stood over behind the University of Cambridge case, you should review your position in anticipation of being contacted by the Tribunal Service to ask whether you wish to continue your appeal.
  • Charities should also consider a wider review of the potential impact of the CJEU’s judgment on their business/non-business and partial exemption apportionment methods.

For help and advice on any VAT issue for not-for-profit organisations, please contact Wayne Neale or Glyn Woodhouse.