Regular readers may have noticed my piece in Tax Journal concerning input tax on the construction of a fountain in Folkestone by a property development company (Folkestone Harbour (GP) Ltd [2015] UKFTT 0101 (TC)). In that case, HMRC challenged input tax recovery on the basis that the fountain was not built on the developer’s land, that it had been built in response to a request from a local authority, and that nobody paid to enjoy the fountain. The tribunal decided, however, that the cost had a direct and immediate link to the taxable activities of the neighbouring development. The costs had been incurred purely for business purposes, so all of the VAT was recoverable.
Only two months later, we have news of an advocate general’s opinion on a case that had been referred by Lithuania to the CJEU (Sveda UAB (C-126/14)). The similarities of the two cases are uncanny. The Lithuanian case, concerning Sveda UAB, involved the construction of an attractive feature which was free for the public to access. This was ‘a recreational trail dedicated to Baltic mythology’. Much like the Folkestone fountain, the trail had been constructed at the behest of a public body; and, in this case, 90% of the funding for the capital expenditure was received from that authority by way of a grant. Sveda only had to suffer 10% of the cost, but reclaimed all of the input tax.
It did this because the trail gave access to a retail outlet to which it wished to entice visitors.
Two basic arguments were ranged against Sveda. First, there was no direct and immediate link between the costs and the retail activity, since visitors could use the mythological trail without needing to make a purchase; therefore, the costs were not closely connected with the taxable business. Second, supported by the UK government, as 90% of the costs had been borne by the grant maker, 90% of the VAT could not in any case be reclaimed since it was not a burden on the pricing of the goods in the shop; and therefore, to that extent, it was not a cost component of those goods. This would mean that there would be insufficient direct and immediate link for the 90%.
The advocate general dismissed both points. From the standpoint of HMRC’s most recent announcement on the doctrine of ‘cost component’ determining the ability to recover VAT (see their policy on holding companies, and their arguments against input tax recovery on investment management fees borne by charities), it is critical that the advocate general repeated the general view, established by the case of The Republic of France (C-243/03), that the mere fact that costs are covered by subsidy has no bearing on whether input tax can be recovered. While acknowledging a general principle that the costs had to be components of the price of the supplies to which they related, the advocate general made it clear that the most important determinant of the required link lay in the overarching use of the costs and how this use was associated with the supplies made. It did not involve a simple allocation of value from the costs to the prices of the supplies.
The advocate general went on to comment that the mere lack of any charge made to those who frequented the mythical trail did not stop the costs having a connection with the taxable supplies which the user of the trail was encouraged to make by using it.
In my view, this must be right. Supermarkets do not charge people for parking in their car parks, but nobody suggests that the VAT on constructing the car park does not have a direct and immediate link with the supplies made in the supermarket.
The advocate general’s opinion may not be followed by the CJEU, but the likelihood is that it will, and this opinion was given with assurance and clarity. If the CJEU agrees, this should bring an end to HMRC’s personal trail of mythology in seeking to stretch the concept of the ‘cost component’ far further than case law has supported.
Regular readers may have noticed my piece in Tax Journal concerning input tax on the construction of a fountain in Folkestone by a property development company (Folkestone Harbour (GP) Ltd [2015] UKFTT 0101 (TC)). In that case, HMRC challenged input tax recovery on the basis that the fountain was not built on the developer’s land, that it had been built in response to a request from a local authority, and that nobody paid to enjoy the fountain. The tribunal decided, however, that the cost had a direct and immediate link to the taxable activities of the neighbouring development. The costs had been incurred purely for business purposes, so all of the VAT was recoverable.
Only two months later, we have news of an advocate general’s opinion on a case that had been referred by Lithuania to the CJEU (Sveda UAB (C-126/14)). The similarities of the two cases are uncanny. The Lithuanian case, concerning Sveda UAB, involved the construction of an attractive feature which was free for the public to access. This was ‘a recreational trail dedicated to Baltic mythology’. Much like the Folkestone fountain, the trail had been constructed at the behest of a public body; and, in this case, 90% of the funding for the capital expenditure was received from that authority by way of a grant. Sveda only had to suffer 10% of the cost, but reclaimed all of the input tax.
It did this because the trail gave access to a retail outlet to which it wished to entice visitors.
Two basic arguments were ranged against Sveda. First, there was no direct and immediate link between the costs and the retail activity, since visitors could use the mythological trail without needing to make a purchase; therefore, the costs were not closely connected with the taxable business. Second, supported by the UK government, as 90% of the costs had been borne by the grant maker, 90% of the VAT could not in any case be reclaimed since it was not a burden on the pricing of the goods in the shop; and therefore, to that extent, it was not a cost component of those goods. This would mean that there would be insufficient direct and immediate link for the 90%.
The advocate general dismissed both points. From the standpoint of HMRC’s most recent announcement on the doctrine of ‘cost component’ determining the ability to recover VAT (see their policy on holding companies, and their arguments against input tax recovery on investment management fees borne by charities), it is critical that the advocate general repeated the general view, established by the case of The Republic of France (C-243/03), that the mere fact that costs are covered by subsidy has no bearing on whether input tax can be recovered. While acknowledging a general principle that the costs had to be components of the price of the supplies to which they related, the advocate general made it clear that the most important determinant of the required link lay in the overarching use of the costs and how this use was associated with the supplies made. It did not involve a simple allocation of value from the costs to the prices of the supplies.
The advocate general went on to comment that the mere lack of any charge made to those who frequented the mythical trail did not stop the costs having a connection with the taxable supplies which the user of the trail was encouraged to make by using it.
In my view, this must be right. Supermarkets do not charge people for parking in their car parks, but nobody suggests that the VAT on constructing the car park does not have a direct and immediate link with the supplies made in the supermarket.
The advocate general’s opinion may not be followed by the CJEU, but the likelihood is that it will, and this opinion was given with assurance and clarity. If the CJEU agrees, this should bring an end to HMRC’s personal trail of mythology in seeking to stretch the concept of the ‘cost component’ far further than case law has supported.
