Decision Date: November 8, 2012
Link: Case Summary Document
Citation: [2012] FTT 687 (TC) (First Tier Tribunal Tax Chamber, Sinfield J, and H Adams)
Acknowledgement:The Pemsel Case Foundation thanks The Australian Centre for Philanthropy and Nonprofit Studies for its contribution in the drafting of this Case Note.


The Guide Dogs for the Blind Association (GDBA) is a charity which uses third-party investment management services for its substantial investments. Until 2005, the GDBA had always treated the input Value-Added Tax (VAT) on investment management services as irrecoverable. However, it had now claimed an amount of £4,879.19 VAT incurred on investment management services, from HRMC. GDBA claimed that it had incurred that amount of VAT on investment management services during the period 1 April 1973 to 31 March 1990. It was not in dispute that it could have claimed at least some portion of this amount if it had been aware of it, but it was disputed that the GDBA had in fact used investment management services in the relevant period.

Following the High Court’s decision in The Church of England Children’s Society v HMRC [2005] EWHC 1692 (Ch), HMRC issued Business Brief 19/05 on 7 October 2005. The Business Brief confirmed that VAT incurred by a charity on raising funds to support both the charitable and the business activities of the charity should be treated as overhead costs of the charity as a whole and were recoverable from HRMC to the extent they were attributable to taxable supplies.

A 2008 House of Lords decision allowed that the usual time limits did not apply in such cases. Following this case, the GDBA made a claim on 25 March 2009 for a proportion of the input VAT incurred on investment management fees which had been treated as irrecoverable in the period 1 April 1973 to 31 March 1997.

In a letter dated 26 July 2010, HMRC approved the GDBA’s claim for the period 1 April 1990 to 30 March 1997, but rejected the claim for the period 1 April 1973 to 31 March 1990. HMRC refused the claim on the grounds that GDBA had failed to establish that:

(1) it had paid investment management fees throughout the period of the claim;

(2) it made taxable supplies throughout that period; and

(3) a proportion of the input tax incurred on investment management fees was attributable to taxable supplies by GBDA.

On the crucial question of whether the GDBA had in fact incurred investment management fees in the relevant period, there was no direct documentary evidence to support the contention that the GDBA had paid management fees on its investments during that time, or, indeed, any evidence at all other than assertion. Could the matter be decided by some form of extrapolation from the evidence that was available? The Tribunal said that it could (at [17]):

In the case of GDBA, we consider that if GDBA paid investment managers to provide investment management services in the years since [their witness] joined the organisation then there is a strong likelihood that GDBA paid such fees in earlier years. The investments in respect of which GDBA incurred investment management fees were not one-off events but carried on, no doubt with changes, from year to year. Further evidence of some relationship with an investment manager or managers is contained in the Financial Statements which, from 1974 to 1980 and in 1987, refer to Lazards [an investment bank] and, from 1988 to 1990, refer to Lazards and Mercury [investment institutions]. We consider that those references strongly suggest a professional relationship. In the later period of 1987 to 1990, it is clear that the companies were investment advisors to GDBA and we conclude, on the balance of probabilities, that Lazards had a similar relationship with GDBA in the earlier years. Based on our knowledge of the commercial dealings between investment managers and their clients in general, we infer that such a professional relationship involved GDBA paying fees for the services of the investment manager. There is a period between 1981 and 1986 where the Financial Statements do not make any reference to any investment manager but we consider that this was no more than a change in the format of the statements. The fact that the Financial Statements for those years show that GDBA still had investments and that Lazards are shown as investment advisors in 1987 suggests that they never stopped providing investment management services and, we infer, charging fees. In conclusion, we find on the balance of probabilities that GDBA paid investment management fees throughout the period 1973 to 1990.

Therefore, the appeal was allowed, and the GDBA could claim the VAT back from HRMC.

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Implications of this case

VAT is a goods and services tax in the UK. Generally, an organisation can reclaim VAT that has been paid on goods or services used within a business. This VAT is called input tax by HMRC. Charities are generally subject to the same VAT rules as any other organisations. There are, however, a number of VAT reliefs and exemptions available specifically for registered charities, subject to certain conditions and restrictions. These are not available to other nonprofits.

In this case, although the GDBA is a registered charity in the UK, normal VAT rules applied to the supplies (investment management services) in question. Since the supplies were normal business supplies, an organisation must keep all financial records (such as VAT receipts) in order to be able to reclaim VAT. This decision appears to indicate that this is not the case for charities (unless the decision is appealed by HRMC).