Investment Management Fees

In recent years, there has been uncertainty over the entitlement to recover VAT on investment management fees. In many cases, HMRC has denied VAT recovery, arguing these costs are directly related to the VAT exempt or non-business activity of investment. However, some organisations have sought to treat them as a general overhead, which would allow a proportion of the VAT to be recovered.

This issue is currently the subject of litigation involving the University of Cambridge. In brief, the University (a registered charity) makes VAT-exempt supplies of education alongside commercial activities, such as research, publishing and consultancy, which are subject to VAT. The University is therefore entitled to recover a proportion of the VAT it incurred on general overheads.

Around 6% of the University’s income came from an endowment fund, managed by a third party investment manager. VAT was incurred on the management fee. Both the First-tier Tax Tribunal and the Upper Tribunal decided that the investment costs were incurred for the benefit of the University’s business activities in general, and not just to support an investment activity.

Subject to any successful appeal by HMRC, this means there is scope for charities to claim VAT on investment management costs, according to their normal entitlement to recover VAT under their business: non-business and partial exemption methods.

Because of the inconsistency in the treatment of such expenditure by charities, there is no one-size-fits-all advice. However, charities should review how they treat investment management costs, and ensure that positive action is taken to maximise available VAT recovery.

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