VAT recovery on investment management costs, not just an issue for charities.

In a long running battle, the University of Cambridge has challenged the way HM Revenue & Customs’ recovers VAT on investment funds of donations and endowments. The University claimed that they should be able to claim back a proportion of the VAT because the investment returns were used to support wider business activities.

The Court of Justice of the European Union found that the costs of managing an investment fund of donations and endowments was a non-business activity in its own right.  It wasn’t sufficiently linked to the business activities made by the charity to allow proportional VAT recovery on fees.  The ruling differentiates the University’s costs from earlier, similar cases where investment income was used to grow business activities, because the University used income from investments to subsidise business income.

This outcome is disappointing for charities. It means they won’t be able to recover a proportion of the VAT incurred on fees relating to the management of investments.  They’ll also need to look at where they’ve recovered VAT in the past, because there may be a potential exposure which should be declared to HM Revenue & Customs.

The wider significance of this case shouldn’t be underestimated.  Whilst the VAT on costs relating to investments in property has always been attributable to the rental activity rather than the wider business activity, charities and businesses should consider other investments they hold and the VAT recovery position in relation to them.  For example, a farmer investing in single farm payment entitlements (and incurring VAT on their purchase) may be deemed to be undertaking a non-business investment activity and unable to recover VAT on costs.  Additionally, in certain circumstances, the receipt of renewable heat incentive/feed in tariff income may also come under scrutiny as a non-business investment activity which result in a partial block on the recovery of the costs of construction.

Need help?

If you have concerns in relation to the above, either as a result of holding significant investments or the receipt of “non-business” income, our VAT team would welcome your call to discuss the potential risks with you.

Call 0330 024 0888 or email enquiry@larking-gowen.co.uk