HMRC Accepts Charities' Fund-Raising VAT Ruling

by Amanda Banks, Tax-News.com, London

10 October 2005

HMRC has issued guidance following a recent decision of the UK High Court which clarified the VAT treatment of costs incurred in fund-raising by charities.

Church of England Children's Society (CECS) is a charity with a wide range of activities. To raise funds, it engages professional fundraisers to secure regular donations from members of the public. Those donating at least £5 per month receive a copy of the charity's newsletter three times a year.

The Court ruled in favour of CECS, overturning a VAT Tribunal's decision that fundraisers' fees related to the non-business activity of seeking donations, so the VAT incurred on them was not recoverable. The Court also reaffirmed the Tribunal's view that the newsletters were not zero-rated supplies of printed matter. However, they were deemed zero-rated gifts of business assets and input tax on their production and distribution costs was recoverable

The High Court decided that if funds raised by donation by CECS were used to fund its taxable business activities, it was entitled to recover related input tax. It followed the recent judgment of the ECJ in Kretztechnik AG v Finanzamt Linz [Case C-465/03]. In that case, the ECJ ruled that, where the capital-raising transaction to which costs most closely relate falls outside the scope of VAT because it is not a supply of goods or services, the costs can relate to the organisation as a whole.

In other words, if the capital-raising transaction is for the purpose of the business's economic activity in general, the transaction has a direct and immediate link with the whole economic activity of the taxable person. VAT on the transaction is recoverable to the extent that the taxable person is making taxable supplies.

The CECS decision has wider implications than the use of professional fundraisers by charities, says HMRC; it could impact on the recovery of any VAT incurred in securing donations or legacies to support the work of a charity.

Says HMRC: Where funds are raised solely for a restricted charitable purpose involving wholly non-business activities, the VAT incurred on raising those funds is not input tax and is not recoverable.

Conversely, where the funds raised are used wholly to support the making of business supplies, all of the VAT incurred on fundraising costs can be treated as input tax. The recovery of this input tax will depend upon whether these business supplies are taxable or exempt. Where fundraising input tax is wholly attributable to the making of taxable supplies by the charity, it can be recovered in full, subject to the normal rules. On the other hand, where fundraising input tax is wholly attributable to the making of exempt supplies by the charity, none of it will be recoverable, subject to the partial exemption de-minimis limits. So where a charity which has non-business and business activities incurs VAT on fundraising costs and the funds raised support various activities of the charity, the VAT incurred can only be recoverable input tax to the extent that the funds raised will support taxable business supplies. In practice this means that VAT incurred on fundraising costs must first be subject to an initial business/non-business apportionment to determine how much of the VAT incurred may be treated as input tax. Then, in circumstances where the charity has exempt business activities, this input tax is further subject to the partial exemption rules. In some cases, a charity's existing business /non-business apportionment method and partial exemption method will produce a fair and reasonable basis by which input tax can be recovered. However, where this is not the case, HMRC will consider proposals for alternative methods. If exceptional circumstances exist, HMRC may allow alternative methods to be applied retrospectively, provided it is fair and reasonable for the charity as a whole.

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