University of Cambridge: non-taxable transactions and VAT deductibility

Where VAT is incurred by a taxable person on goods or services used to make an exempt supply, the VAT is wholly non-deductible. This is the case even where the wider purpose or intention of the expenditure is to benefit the taxable person’s business as a whole. In University of Cambridge (Case C-316/18), the question arose as to whether the same is true in relation to VAT incurred on supplies used for non-taxable transactions, i.e. transactions that are non-economic or otherwise fall outside the scope of VAT. Whilst the CJEU’s answer is not straightforward, its reiteration of the principles laid down in Kretztechnik should put paid to HMRC’s contention that there is no distinction between exempt and non-taxable transactions when considering whether VAT incurred for the purposes of such transactions is deductible.