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when is vat paid

Posted by. Rachel Holmes | Date posted. 30/10/2013

Where a charity pays VAT on goods and services, it can only reclaim that VAT to the extent that it uses those goods and services to make its own taxable supplies (that is, supplies on which the charity charges VAT). If the charity uses the goods or services to make both taxable and non-taxable supplies, the charity can apportion the VAT it has paid between its taxable and non-taxable supplies, and reclaim the proportion attributable to its taxable supplies.

Charities with large investment portfolios may pay VAT on fees charged by investment managers. For a while, there have been discussions among tax and charity professionals about whether this VAT can be reclaimed, where the charity applies the funds arising from their investments to make taxable supplies. HMRC’s position has been that it cannot.

In August, the First Tier Tribunal (the FTT ) had to decide this issue in the case of The Chancellor, Masters & Scholars of the University of Cambridge v Commissioners for Her Majesty’s Revenue & Customs.

The University was appealing against HMRC’s refusal to allow it to recover a proportion of input tax on professional fees paid to those managing its endowment fund. Income from the endowment fund is used to support work across the University and its Colleges. That work involves making taxable and exempt supplies. In a letter to HMRC, the University had argued that the fees were overhead costs and so the input tax should be apportioned between exempt and taxable supplies according to the method agreed between the University and HMRC. HMRC disagreed: it claimed that managing the permanent endowment was a non-business activity of the University that had no direct and immediate link to the University’s supplies. It was, rather, linked to the non-business supplies it made when it disposed of investments forming part of the endowment fund. As such, HMRC argued, VAT on the investment management fees could

not be deducted.

At the FTT, the parties agreed:

  • that operating the endowment fund was not an economic activity in its own right and so was outside the scope of VAT;
  • that the issue for the FTT was whether the University had the right to deduct (partially) VAT on the costs of operating the endowment fund as an overhead expense.

Having reviewed the relevant case law, the FTT concluded:

"The purpose of a particular activity, and in this case the [University’s] investment activity which was not by itself an economic activity, must be looked at objectively to determine whether the costs associated with that activity qualify as overheads. If the purpose of the activity is to benefit the other economic activities then the costs of the non-economic activity can be regarded as overhead costs so that the input tax is deductible wholly or in part, depending on whether outputs include exempt as well as taxable supplies… Although there were separate activities, the investment activity was effected for the benefit of the [University’s] other activities. There cannot be any other conclusion if the investment activity was not something which was carried on for its own sake. The costs of the investment activity were incurred solely for the benefit of the [University’s] economic activity in general, and objectively were not incurred for the purpose of its non-economic investment activity."

In other words, the University’s position was correct – input tax could be partially deducted according to the agreed apportionment method.

Needless to say, this case has welcome implications for charities with investments that make taxable supplies. If your charity falls into this category and you would like advice on how to proceed, please contact your usual adviser within the Firm.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, October 2013

Category: Bank

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