Another defeat for HMRC on Fund Management Fees in Upper Tribunal
The Upper Tribunal has released its decision in the case of The Chancellor, Masters and Scholars of the University of Cambridge (UKUT 0305 TCC). This case was heard on 17 March 2015 and the decision released earlier this month.
The issue in point was whether VAT incurred by the university on Fund Management Fees charged by suppliers was partly recoverable. HMRC challenged a partial input VAT recovery on these costs on the basis that these funds are derived from a non-business activity. This was not in dispute; however, the university’s position is that income generated by the fund supports all its activities. The fund is unrestricted in the university’s hands and income generated is used in the furtherance of business (taxable and VAT exempt) and non-business activities. HMRC’s view is that the costs incurred related wholly to carrying out non-business activities.
This case was initially heard before the First Tier Tax Tribunal (FTT) on 19 August 2013. The FTT found in the university’s favour and the Upper Tier Tribunal (UTT) has dismissed HMRC’s appeal. The investment activity is outside the scope of VAT. As a result there is no supply or activity to which the VAT costs incurred can be directly attributed. However, the fund is used to support all of the university’s activities. The university makes VAT exempt supplies of education and taxable supplies including accommodation (out of term time) and catering. The UTT agreed with the FTT, the costs incurred are overheads and fall to be apportioned.
It remains to be seen how HMRC will react to the conclusion reached by the UTT. The position on the recovery of VAT incurred on investment management fees has been unclear for some time. HMRC did allow a partial input VAT recovery where it could be demonstrated that investment income was used to support taxable business activities; however, a policy shift saw HMRC challenging input VAT entitlement on the basis that an investment portfolio is not a business activity.
As the UTT has clarified the position it is hoped that HMRC will accept the decision. In the meantime we would recommend considering the following action:
- If HMRC have raised protective VAT assessments on charities these should be withdrawn.
- If charities have VAT repayment claims outstanding these should be repaid, assuming the conditions set out by the UTT for a partial VAT recovery are satisfied.
- Charities should consider requesting interest payments in addition to VAT sums due. In view of the ongoing litigation in Littlewoods compound interest may be requested to protect charities positions.
- If charities have incurred VAT on investment management fees, and not recovered any input VAT on these costs, it may be possible to submit retrospective VAT refund claims (in-line with capping legislation) and the matter should be reviewed.
If you would like to discuss the implications of this decision please do not hesitate to contact Stewart Henry or Sophie Cox on 020 7830 9669 or 01206 321029 or by email on stewart.henry@ukvatadvice.com or sophie.cox@ukvatadvice.com.
Constable VAT Consultancy LLP (CVC) is a specialist independent VAT practice with a nationwide client base and offices in London and East Anglia. We work together with many charities and not-for-profit bodies ranging from national charities to regionally based organisations.
We understand that charities wish to achieve their objectives whilst satisfying the legal requirements placed upon them. Charities may be liable to account for VAT on supplies made and VAT will be payable on certain expenditure. As irrecoverable VAT represents an absolute cost to most charities, regardless of their VAT registration status, there is a need to review the position regularly and carefully. We offer advice with planning initiatives, technical compliance issues, complex transactions, help with innovative ideas on VAT saving opportunities, and liaising with HMRC.
If you would like to discuss how VAT impacts on your organisation please contact Stewart Henry, Laura Beckett or Sophie Cox on 020 7830 9669, 01206 321029 or via email on stewart.henry@ukvatadvice.com, laura.beckett@ukvatadvice.com and sophie.cox@ukvatadvice.com. Alternatively, please visit our website at www.ukvatadvice.com where you can view some of the services we offer in more detail and subscribe to our free general and regular VAT alerts and updates. Visit our website for current news updates. You can also follow CVC on Twitter.
This newsletter is intended as a general guide to current VAT issues and is not intended to be a comprehensive statement of the law. No liability is accepted for the opinions it contains or for any errors or omissions. CVC cannot accept responsibility for loss incurred by any person, company or entity as a result of acting, or failing to act, on any material in this newsletter. Specialist VAT advice should always be sought in relation to your particular circumstance.