Chancellor, Masters and Scholars of the University of Cambridge
| Jurisdiction | UK Non-devolved |
| Judgment Date | 19 August 2013 |
| Neutral Citation | [2013] UKFTT 444 (TC) |
| Date | 19 August 2013 |
| Court | First Tier Tribunal (Tax Chamber) |
[2013] UKFTT 444 (TC)
Judge Michael S Connell, James Midgley.
Mr Andrew Hitchmough appeared for the Appellant
Mr Sarabjit Singh, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Value added tax - whether input tax recoverable - tax incurred on non-business investment activity raising income used by University to facilitate and support its other activities both taxable and exempt - whether fees incurred on management of fund an overhead for input tax to be treated as residual - yes - tax recoverable under appellant's partial special exemption.
The First-tier Tribunal allowed the taxpayer university's appeal against HMRC's refusal of its claim for deduction of a proportion of input tax incurred on the payment of professional fees for the management of its endowment fund. There was clearly a link between the taxpayer's investment activity and its overall economic activity. Costs associated with the investment activity were, in reality, components of the price of both taxable supplies, such as research, and exempt supplies, such as education. Input tax was, therefore, required to be apportioned in accordance with the university's agreed partial exemption special method under Value Added Tax Regulations 1995 (SI 1995/2518), reg. 102.
The taxpayer university was a charity doing the business of education, research, academic publishing and consultancy. It received donations which were invested in an endowment fund. The fund invested in a range of securities including equities, property, bonds, cash deposits and other investments. The taxpayer used professional fund managers in both the UK and the US. It incurred fees on the management of its investments and some of those were liable to input tax. The fund produced over £40m of income per year, which contributed to the taxpayer's group income of £1.26bn. The income was distributed across the university in support of all of its activities. Income provided by its investment activities covered around six per cent of the taxpayer's operational expenditure.
The taxpayer incurred input tax on some of its professional investment advice. However, it did not regard the investment activity as a specific business activity because its investment income was outside the scope of VAT. Thus, the taxpayer had not recovered any VAT incurred as input tax.
Following the decision in Fleming (t/a Bodycraft) v R & C CommrsVAT[2008] BVC 221, the taxpayer claimed under-recovered input tax for the period between 1 April 1973 and 1 May 1997. It also claimed under-recovered input tax for the period between 1 May 2006 and 31 January 2009 pursuant to the Value Added Tax Regulations 1995 (SI 1995/2518), reg. 29. Relying on Kretztechnik AG v Finanzamt LinzECAS (Case C-465/03) [2006] BVC 66 ("Kretztechnik") and Securenta Göttinger Immobilienanlagen und Vermögensmanagement AG, as the legal successor of Göttinger Vermögensanlagen AG v Finanzamt GöttingenECAS (Case C-437/06) [2010] BVC 766 ("Securenta"), the taxpayer contended that as it simultaneously carried out economic activities and uneconomic activities, the input tax on investment management services was an "overhead" cost related to raising funds to support all of its activities. Thus, input tax was recoverable to the extent that its activities were carried out for taxable purposes within VAT Directive 2006, eu-directive 2006/112 subsec-or-para 1 article 2art. 2(1).
HMRC rejected the taxpayer's claim. They held that the input tax it incurred related to a non-business activity and was of too considerable a size to be regarded as "incidental". They stated that its endowment fund invested in a range of securities and was actively managed for the best return. The cases of Kretztechnik and Securenta were not relevant as they related to transactions involving the issue of shares in companies to obtain fresh capital finance, as opposed to the taxpayer's broader and freestanding investment activities.
A particular activity, which is not by itself an economic activity, must be looked at objectively to determine whether the costs associated with that activity qualify as overheads. If the purpose of the activity is to benefit the other economic activities, then the costs of the non-economic activity can be regarded as overhead costs so that the input tax is deductible wholly or in part, depending on whether outputs include exempt as well as taxable supplies. Here, the Tribunal held that the professional management and other costs associated with the investment activity formed part of the component parts of the taxpayer's supplies. Although there were separate activities, the investment activity was effected for the benefit of the taxpayer's other activities.
In Kretztechnik, it was held that the taxpayer's costs of the supplies acquired in connection with the share issue had to be regarded as part of its general overheads and component parts of the price of its products. Therefore, those supplies had a direct and immediate link with the whole economic activity of the taxable person. Here, the Tribunal held that there was clearly a link between the taxpayer's investment activity and its overall economic activity. Costs associated with the investment activity were in reality components of the price of the taxpayer's research and publications on one hand, and educational and other exempt activities on the other hand. Furthermore, the overheads relating to a non-economic activity undertaken for the purchase of an economic activity should be regarded as recoverable because the taxpayer's non-economic activity might technically be capable of falling within the definition of "supply" under VAT Directive 2006, eu-directive 2006/112 subsec-or-para 1 article 2art. 2(1).
The tribunal concluded, on the evidence, that there was a link between the operation of the university's endowment fund and its overall economic activity. Once this link had been established, it was inevitable that the costs of managing the fund should be treated as partly attributable to the making of taxable supplies. In accordance with its approved partial exemption special method, the university was entitled to recover, in part, the VAT incurred. For commentary on attributing input tax for partial exemption purposes, see the CCH VAT Reporter at 19-450.
[1]This is an appeal by the University of Cambridge (full legal name, The Chancellor, Masters and Scholars of the University of Cambridge) against HMRC's decision to refuse its claim for recovery of a proportion of input tax incurred on the payment of professional fees for the management of its endowment fund.
[2]The claim is in respect of :
(a) under-recovered input tax for the period between 1 April 1973 and 1 May 1997 following the Fleming (t/a Bodycraft) v R & C CommrsVAT[2008] BVC 221 decision and hmrcbrf 07/08HMRC's Brief 07/08 and
(b) under-recovered input tax for the period between 1 May 2006 and 31 January 2009 pursuant to SI 1995/2518 regulation 29.
[3]As a charity, the Appellant is a non-profit making body in the business of education, research, academic publishing and consultancy. It receives donations which are invested in The Cambridge University Endowment Fund. The fund invests in a range of securities including equities, property, bonds, cash deposits and other investments. The Appellant uses professional fund managers in both the United Kingdom and the United States. It incurs fees on the management of its investments and some of these are liable to input tax, depending on the nature of the investment. The fund produces over £40m of income per year, which contributes to the Appellant's group income of £1.26b. The income is distributed across the University in support of all of its activities. Income provided by its investment activities cover around 6% of the Appellant's operational expenditure. As a charity the Appellant is required to expend all of its income in the deliverance of its chargeable aims. This includes taxable, exempt and non-taxable activity.
[4]The University of Cambridge and the associated Cambridge Colleges (collectively) have separate functions. The University provides the infrastructure and staff for research: it delivers teaching through lectures: conducts examinations and awards degrees. The Colleges recruit students, provide accommodation, catering, pastoral care and guidance. So whilst the University and Colleges have a common purpose, they fulfil different roles in delivering that purpose.
[5]The University's main activity, that of providing education, is an exempt supply. Its principle taxable activity relates to commercial research, sales of publications, consultancy and the hiring of facilities and equipment. The Colleges generate taxable supplies through bars, external catering and provision of non term time accommodation.
[6]The Appellant therefore has a combination of both taxable and exempt supplies and is partially exempt. Input tax is accordingly attributed to taxable supplies where possible, leaving the balance as exempt input tax.
[7]Where a business makes partially exempt supplies the method used to calculate the taxable input tax can either be the standard method which is the default option or a special method agreed with Revenue and Customs. Input tax can only be attributed if the whole of the supply to which the input relates is used for either exclusively taxable or wholly exempt supplies and there is a direct and immediate link. Where this is not possible the related input tax is treated as residual input tax which must be apportioned between exempt and taxable supplies. The amount applicable is added to the total attributed or exempt.
[8]The Appellant's residual input tax was agreed with HMRC using an agreed methodology known as the CVCP Agreement (the Committee of Vice...
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