Potential VAT saving opportunity for charities

VAT a charity incurs on investment management fees cannot be recovered as input tax.

As significant investment manage fees are incurred I felt you may be interested in a potential VAT saving opportunity. It involves using an investment manager that is located outside the VAT territory of the UK and the EU so that VAT is not charged on the investment management fees.

Deciding to use an investment manager that does not charge VAT on the fees does not in itself result in VAT being saved. This is because current HMRC policy is that an amount equivalent to the VAT that would have been charged, had an investment manager located in the UK supplied the services, should be accounted for to HMRC via Box 1 of the relevant VAT Returns. The VAT saving opportunity has arisen because a charity, The Welcome Trust Ltd, has successfully challenged this HMRC policy.

The Wellcome Trust Ltd accounted to HMRC for VAT equivalent to over £13 million in relation to investment management services it had received from suppliers located outside of the UK and the EU. It then submitted claims for VAT refunds to HMRC, which HMRC refused to pay. The Wellcome Trust Ltd successfully submitted an appeal to the First Tier Tribunal in relation to the HMRC decision to refuse to pay the refund claims.

HMRC policy has not changed as a result of the First Tier Tribunal decision and HMRC has indicated that it has appealed the decision to the Upper Tribunal. In the meantime we recommend that charities that are incurring a significant amount of fund management fees consider whether it may be appropriate to use an investment manager located in a jurisdiction that does not charge VAT. Whether or not it is appropriate for each charity will depend on all of the facts. VAT is only one factor that should be considered.

If a decision is made to use an investment manager located in a jurisdiction that does not charge VAT, it will be important to comply with HMRC policy and include the VAT that would have otherwise been charged in Box 1 of the relevant VAT Returns, at least until the litigation has concluded. As the litigation may take several years to conclude, protective VAT refund claims can be submitted to HMRC. If HMRC changes its policy on the matter it should release the VAT refunds claimed, providing the refunds were correctly claimed.

Please let us know if you would like to discuss this matter in more detail contact Alex Millar – amillar@garbutt-elliott.co.uk