One of the most fundamental principles behind VAT is that in order to allow a taxable person to recover input VAT, the tax incurred must have been in relation to goods or services that were supplied for the purpose of VATable business activities.
Though simple enough in principle, this area can become more complex if costs incurred by a taxpayer are used wholly or even partially for VATable purposes, which is an issue often faced by charities, not-for-profit and other grant-funded organisations.
The recent case of Revenue and Customs Commissioners v Chancellor, Masters and Scholars of the University of Cambridge has highlighted just how complex this area of VAT can be, and the importance of properly considering all aspects of how business vs non-business activities are treated under VAT.
Disagreements over the definition of business activity'
In its day-to-day operations, the University of Cambridge supplies services that are both taxable and exempt under VAT, in addition to its various non-business activities. As such, any VAT recovery is subject to a business/non-business and partial exemption apportionment of its residual input tax.
The case, which first came to court in 2015, arose when the university sought to reclaim VAT incurred in relation to the Cambridge University Endowment Fund, where donations received by the university are placed and used to finance a variety of investments, including property. Income received through the fund as a result of these investments is then used to support the university's various activities.
The services of a fund manager had been procured by the university, with the fee agreed for the fund manager's activities based on a percentage of the total value of the fund. After reviewing this arrangement, HM Revenue & Customs did not consider the fund to be a business activity of the university, meaning that VAT on any costs attributable to the fund would not be available to reclaim.
A negative outcome for the university
The University of Cambridge decided to lodge a claim on the basis that 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. As such, it argued that any input tax incurred with regard to fund management should be available as residual input tax, and therefore recoverable in part.
The university was initially successful in this claim, as the First-Tier Tribunal agreed that there was a direct and immediate link between the investment of the fund and the economic activity of the university. Because it was decided that any investments made by the fund had been made with the intention of supporting the university’s business and non-business activities, it ruled in Cambridge’s favour, a decision that was later upheld by the Upper Tribunal.
However, this case was eventually passed along to the Court of Justice of the European Community in 2019, which overturned the decision and ruled in HMRC’s favour. The EU court decided that because any costs associated with managing the fund were part of an underlying non-economic activity and could not be incorporated into the price of any particular good or service, input VAT recovery of associated costs was not possible.
The lesson for businesses
This ruling set a legal precedent that is likely to prevent charities or other not-for-profit organisations from recovering VAT incurred on costs relating to investment in funds. It also underlines the central importance for all businesses of looking not just at what your costs are initially used for, but also whether the costs ultimately result in VATable income being generated.
If you or your clients are in receipt of both VATable and non-VATable income and are unsure about whether you have the capability to recover any VAT, it is therefore worth taking the time to get the right advice and information about the legal status of your activities.
Contact our free VAT helpline for an initial discussion, as we may be able to identify ways to improve your or your clients’ VAT recovery position. Call us on 0333 3638 012 to speak to our team of experts.
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