A decision of the High Court in the case of Church of England Children’s Society v HMRC has opened the way for charities to claim VAT on fundraising costs. The court held that VAT on charges levied by face-to-face professional fundraising organisations (PFO's) can be claimed to the extent that they are attributable to the charity's VATable business activities.

Potentially this is a very significant victory for the charity sector and could allow significant retrospective reclaims as well as reducing charities' costs going forward.

Background

The Children's Society employed a PFO to sign up new donors by means of a face-to-face campaign. The donors would receive a newsletter and the Children's Society argued that this was a zero rated supply to which all of the VAT on the agency's fee could be attributed, and therefore claimed in full. Customs disagreed and refused their claim. They said that the payments by the donors were donations, not consideration for a supply of a newsletter. They ruled that the costs of producing the newsletter (including the PFO's fees) were not in any way related to the Society's business activities, and consequently there was no basis for any VAT recovery.

The Tribunal broadly found in Customs' favour. Although it decided that the newsletter was a deemed supply, and allowed the Society to claim VAT on directly-related costs of production and distribution, the PFO's costs were for soliciting donations. Fundraising is not a business activity, and therefore VAT could not be reclaimed at all.

The High Court ruling

The High Court overturned this decision, and found in favour of the Society. In support of this it drew on the recent ECJ case of Kretztechnik AG v Finanzamt Linz which found that costs relating to a share issue could be treated as relating to the business's wider activity and claimed to the appropriate extent. In other words, if a business was fully taxable it could expect to recover all VAT incurred on its costs. The decision was a landmark because it ruled that share issues, which were previously accepted to be exempt supplies, were in fact not supplies at all but simply a means of raising finance. In deciding on whether VAT was reclaimable, the correct test to apply was to look at the purpose for which the finance was raised - if it was to generate wholly taxable activities, then the VAT would be fully recoverable.

The Children's Society argued that fundraising should not be seen as an end in itself but as a means of raising income to support the charity's wider activities. To the extent that these included VATable activities, then the VAT should be allowed. In support of this it drew on the recent ECJ case of Kretztechnik AG v Finanzamt Linz. The High Court found in favour of the Society on this basis, and ruled that the parties should agree on the appropriate percentage of VATable use, failing which the Tribunal would be asked to decide the point.

How does this affect UK charities?

This ruling would appear to negate the need for charities to undertake a business/non-business apportionment where they can demonstrate that their fundraising activities are undertaken to support their underlying business activities. Therefore more VAT would fall into the residual input tax pot. Charities may need to consider a means of apportionment which is not values-based in order to ensure a more equitable allocation of costs.

In addition, it also opens the way for UK charities to claim the appropriate percentage of VAT in respect of fundraising costs which previously may have been treated as irrecoverable on the basis that they were wholly used in non-business activities. Claims can go back for the last three years. It should also allow VAT to be partially recovered on such activities going forward. The relevant types of expenditure will differ from charity to charity but it should include:

• PFO charges
• Direct mailing costs
• Legacy costs
• Payroll giving recruitment
• Door-to-door, public collections and other face-to-face fundraising
• Other committed fundraising costs

What you need to do

Although it is not yet known whether Customs are to appeal the decision, charities should take steps now to identify VAT incurred on fundraising costs and where appropriate submit a protective claim. Going forward, charities should also consider how much VAT can be treated as reclaimable on such costs.