Business and Non-Business Activity

It is a fundamental VAT principle that in order to allow a taxable person to recover input VAT, the VAT incurred must have been in relation to goods or services that were supplied for the purpose of VATable business activities. This creates scope for argument with HMRC concerning if costs incurred by a taxpayer are used wholly or even partially for VATable purposes, which is an issue many charities, not for profit and other grant funded organisations often face.

The case of Chancellor, Masters and Scholars of the University of Cambridge v Revenue and Customs Commissioners highlights how complex this area of VAT can be and why it is important to look not just at what the costs are initially used for but also if the costs ultimately result in VATable income being generated.

The University makes both taxable supplies and exempt supplies as well as having non business activities so any VAT recovery is subject to a business/non business and partial exemption apportionment of residual input tax. The University sought to reclaim VAT suffered in relation to the Cambridge University Endowment Fund where donations received by the University are placed. The fund is used by the University to finance a variety of investments including property.

The income received by the fund as a result of these investments was then used to support the University’s activities. The services of a fund manager were procured by the University and the fee agreed for the fund manager’s activities was based on a percentage of the total value of the fund. HMRC did not consider the fund to be a business activity of the University and so the VAT on any costs attributable to the fund would not be available for reclaim.

A claim was lodged on the basis that, as the income of the fund was used solely for the overall support of the University and applied to both its business and non-business activities the input tax incurred with regards to fund management should be available as residual input tax (and thus recoverable in part). The University were successful in their claim as it was established that there was a direct and immediate link between the investment of the fund and the economic activity of the University in that any investments made by the fund had been made with the intention of supporting the Universities business and non-business activities.

Action point – if you or your clients are in receipt of both VATable and non VATable income and have restricted ability to recover VAT it is worth contacting our fee VAT helpline for an initial discussion as we may be able to identify ways to improve you or your clients VAT recovery position.

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