The decision of the First-tier Tribunal in The Chancellor, Masters and Scholars of the University of Cambridge v HMRC [2013] UKFTT 444 (TC) deals with the issue of VAT recovery in the context of an investment activity.
What was the dispute about?
Cambridge University is a charity whose main activity is the VAT exempt supply of education. It also carries on certain activities (e.g. catering and non-term time accommodation) which are taxable. The university funds its activities by investing donations and applying the returns to its business activities. It pays investment managers to manage these investments and incurs VAT on their fees.
The university sought to recover this VAT to the extent that the returns on the investments were subsequently applied to those of its activities which are taxable. It relied primarily on the CJEU’s judgment in Kretztechnik (C-465/03). In that case, the CJEU held that the issue of shares was not a supply for VAT purposes and that, in the circumstances, the costs incurred on issuing those shares formed part of the company’s general business overheads. The university argued that one could look through the investment activity to the business activity which formed its purpose, so that a proportion of the VAT incurred was recoverable.
By contrast, HMRC argued that the tribunal should distinguish the university’s arrangement from Kretztechnik. In that case, the capital raised by the issue of shares was not attributable to a supply (business or non-business), whereas the university’s fundraising was attributable to non-business supplies. HMRC argued that the tribunal should draw a distinction between raising capital by issuing shares, on the one hand, and receiving returns from the disposal of shares, on the other.
What was decided?
The tribunal first considered the bedrock case of BLP Group [1995] STC 424. In that case, the VAT was incurred on fees in respect of an exempt sale of shares. The appellant asked the court to look through the exempt supply to the ultimate intention of the taxpayer, which was for making taxable supplies. The CJEU held that one may not look through an exempt supply to the supplies which form its purpose.
By contrast, in the present case there was no exempt supply but rather a non-business investment activity. The investment activity was not an activity carried out for its own sake. Although it was a separate activity, it was undertaken for the benefit of the appellant’s other activities.
The tribunal held that the university could attribute the VAT incurred on the managers’ fees to its business activities. A taxpayer is able to recover VAT on costs attributable to non-business activities, provided that those non-business activities are linked to taxable business activities. Where such a situation arises (such as with the university’s investment costs), HMRC should ‘look through’ the non-business activity and consider the ultimate purpose for which the taxpayer incurred the costs.
Was the decision a surprise?
Yes – HMRC’s view accords with the traditional position whereby a taxpayer cannot recover VAT on the costs of making its non-business supplies. This decision expands the scope of Kretztechnik by allowing a taxpayer to recover, in principle, VAT on fundraising costs attributable to a non-business activity, by inferring a link to any business activity funded by the proceeds. The tribunal’s decision took a wider interpretation of Kretztechnik, whereby a taxpayer can look through a non-business investment activity since such an activity would fall outside the scope of VAT, irrespective of whether it is capable of being a business supply.
Is it likely that HMRC will appeal?
Yes – in Kretztechnik, and the similar Church of England Children’s Society [2005] STC 1644, the taxpayers were able to recover the VAT on their fundraising costs because, in each case, the taxpayer made no outbound supply to which the costs were attributable. HMRC potentially has a robust argument that, because the university’s costs were directly attributable to the disposal of shares, being a non-business supply but a supply nevertheless, on a narrow interpretation of Kretztechnik the taxpayer should not be able to attribute those costs to those of the university’s business activities.
Since this is the first time that such a dispute has been litigated in these terms, it is possible, of course, the higher courts will interpret that the tribunal was correct in its approach.
What are the implications of this decision?
Subject to appeal, HMRC must look through a taxpayer’s non-business activities and acknowledge any linked, taxable business activities.
For taxpayers, this means that anyone who:
may now be able to reclaim some or all of the VAT charged on the investment management fees. Such taxpayers may wish to file protective claims in advance of any appeal.
An article providing a more detailed review of this decision will be published shortly.
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