Recovery of VAT on investment management services

21 Jul 2019

income returns

The Court of Justice of the European Union (CJEU) recently released its decision in a case against a UK taxpayer in the case of Chancellor, Masters and Scholars of the University of Cambridge (C-316/18).

The case concerns the recovery of VAT on investment managers fees, which charities and other not-forprofit organisations currently treat as a general overhead for VAT purposes, recovering the VAT paid using their annual recovery rate.

This case was originally lost by HM Revenue & Customs (HMRC) in the UK courts, though it has come as a surprise that it was lost by the University of Cambridge at the CJEU. The judgement will result in a change in the treatment of how this input tax is treated in the UK.

There is still the ability to recover VAT on investment management costs, however this will be in very limited cases and unlikely to apply to most charities and not-for-profit organisations. There is a slim window whereby, if the investment managers fees are a cost component of fees which are charged, then the VAT could still be partially recovered. However, it is not expected to be the case with most charities and not-for-profit organisations.

Additionally, there is concern that there could be far reaching consequences of the decision in this case, which could disrupt other forms of input VAT being recovered. A key concern would be an adverse impact on the recovery of input VAT on fundraising costs relating to raising unrestricted income.

HMRC has yet to release any response to the case and at this stage, but we expect it will reduce input tax recovery for charities and other not-for-profit organisations in the future. HMRC’s business brief will most definitely call for taxpayers affected by this decision to adjust their VAT returns to take account of the decision in this case.

Our recommendation would be for charities to review the VAT recovery on these costs for their current and future VAT returns. Additionally, careful attention should be drawn to HMRC’s brief when it is released to considered if there is any retrospective action required to correct previous VAT returns.

Should you have any questions on this case, please contact either Alison Hone or Sean McGinness.