Tax Journal

VAT focus: AES and the Redrow principle

20 September 2013

Following several decisions of the CJEU, formerly the ECJ, there was concern that Redrow did not sit comfortably with CJEU jurisprudence. However,  in AES-3C Maritza East 1 (Case C-124/12), the CJEU has articulated the same principles. The starting point for both AES and Redrow appear to be not to focus on what the payment is for, but rather whether the nature of the expenditure is such that it has a direct link (in a cost component way) to the economic activity of the taxpayer’s business. If the answer is yes, identifying precisely what was supplied does not really matter. The VAT should be recoverable.

There is support for the Redrow principle in the CJEU decision of AES, write Amanda Brown and Kristie Schubert

On 18 July 2013, the CJEU handed down its decision in the matter of AES. In essence, the case concerned the deductibility of VAT pursuant to article 168(a) of Council Directive 2006/112/EC in circumstances where the entity seeking the deduction has paid the VAT on goods or services that, on the surface, are provided to another entity.

Background cases


On 11 February 1999, the House of Lords handed down its decision in Commrs of Customs & Excise v Redrow Group PLC [1999] UKHL 4.

By way of background, Redrow was in the business of constructing new homes for sale in the private sector. The issue in dispute was whether Redrow was entitled to deduct as input tax the VAT charged by real estate agents as part of a scheme whereby, to encourage the sale of new houses, Redrow paid the real estate agent’s fees for selling the prospective purchaser’s properties.

The House of Lords found it was sufficient that the taxpayer obtained something of value in return for the payment in respect of services supplied to a third party, and what it obtained was for the purposes of the taxpayer’s business. The court held: ‘one should start with the taxpayer’s claim to deduct tax. He must identify the payment of which the tax to be deducted formed part; if the goods or services are to be paid for by someone else he has no claim to deduction. Once the taxpayer had identified the payment the question ...

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