Your World of Legal Intelligence
 United Kingdom | +44 (0) 20 7284 8080

Revenue and Customs Commissioners v Chancellor, Masters and Scholars of the University of Cambridge

CCH British VAT Cases Cited authorities 15 Cited in 8 Precedent Map Related
Vincent
JurisdictionUK Non-devolved
Judgment Date09 June 2015
Neutral Citation[2015] UKUT 305 (TCC)
Date09 June 2015
CourtUpper Tribunal (Tax and Chancery Chamber)
[2015] UKUT 0305 TCC
Upper Tribunal (Tax and Chancery Chamber)

Mr Justice Simon, Judge Greg Sinfield

Revenue and Customs Commissioners
and
Chancellor, Masters and Scholars of the University of Cambridge

Sarabjit Singh, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Appellant

Andrew Hitchmough QC and Barbara Belgrano, counsel, instructed by [?], appeared for the Respondents

Value added tax – Input tax – Endowment Fund for benefit of University – Investment activity of University was not an economic activity and so was outside the scope of VAT – Deductibility of input tax on fund management fees – (1) Whether fund management fees were overheads – Yes – (2) Whether fund management services had direct and immediate link with economic activity of University as a whole – Yes – HMRC's appeal dismissed.

The Upper Tribunal (UT) dismissed HMRC's appeal against the decision of the First-tier Tribunal (FTT) ([2013] TC 02836) that, although it was a separate activity, an investment activity was not carried out for its own sake, but was undertaken for the benefit of the University's other activities.

Summary

The University was a charity and in the business of education, research, academic publishing and consultancy. It received donations, which were invested in a Fund. That Fund had equities, property, bonds, cash deposits and other investments. The University used professional fund managers, such as F&CM. It incurred fees on the management of its investments and some of those fees were liable to VAT. The Fund income exceeded £40m each year, which contributed to the University's group income of over £1bn. The income was distributed across the University to support all of its activities. The income provided from its investment activities was about 6% of the University's operational expenditure. The University had not regarded the investment activity as a business activity, because its investment income was outside the scope of VAT, so it had not reclaimed any VAT incurred on those fees.

Following Fleming (t/a Bodycraft) v R & C Commrs VAT[2008] BVC 221, the University claimed under-recovered input tax for the period between 1 April 1973 and 1 May 1997 and between 1 May 2006 and 31 January 2009, under the Value Added Tax Regulations 1995 (SI 1995/2518), reg. 29. Relying on Kretztechnik AG v Finanzamt Linz ECASVAT(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 Göttingen ECASVAT(Case C-437/06) [2010] BVC 766 (“Securenta”), the University claimed that, as it simultaneously carried out economic activities and non-economic activities, the input tax on investment management services was an “overhead” relating 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 Directive 2006/112 (the Principal VAT Directive), art. 2(1).

HMRC rejected the claim, on the basis that the VAT related to a non-business activity and was too much to be “incidental”.

The First-tier Tribunal (FTT) held that the professional management and other costs associated with the investment activity were part of the component parts of the supplies. Although there were separate activities, the investments were effected to benefit of the University's other activities.

The parties agreed that the only issue was whether the fees were overhead expenditure and attributable to the University's economic activity as a whole, which would allow the University to deduct part of the VAT.

Both parties accepted that, in order to be entitled to deduct input tax, a taxable person must show either:

  1. 1) a “direct and immediate link” between a particular input transaction and a particular output transaction or transactions giving rise to the entitlement to deduct; or

  2. 2) that the costs of the services in question were part of the taxable person's general costs (“overheads”) and were, as such, components of the price of the goods or services that the taxable person supplies, thereby having a direct and immediate link with the taxable person's economic activity as a whole (para. 20 of the decision).

HMRC argued that, in order to be regarded as overheads, the costs relating to the inputs must be cost components (in the sense of being incorporated in the price) of all the taxable person's economic activities (para. 22 and 60 of the decision).

The UT did not accept that the costs of F&CM's services burdened the investment activity in the sense that the fees were incorporated into the price of investments that were sold by the University. The services provided by F&CM were general investment management services and not merely services related to disposals of investments. Before the FTT, HMRC argued that, on average, the Fund held shares as investments for approximately five years and that, although there might have been a small amount of trading of investments, the vast majority of the investment activity was not trading. A large proportion of the investments held in the Fund were quoted securities. The investments were not traded, but were held for substantial periods. The fees charged by F&CM were calculated as a percentage of the value of the Fund and not by reference to the number or value of disposals of investments. Those factors indicated that F&CM's fees were not cost components of the prices charged when investments were sold. The FTT found that the costs associated with the investment activity were components of the price of the University's various economic activities. That was a finding that the FTT was entitled to make and it did not show any error of law (para. 61 of the decision).

The UT did not see any distinction between capital-raising and income-generating activities for the purpose of determining whether input tax incurred on overhead costs was attributable to the taxable person's economic activity as a whole (para. 62 of the decision).

The UT was not satisfied that the Fund was engaged in purely income-generating activities. Although the investments produced income in the form or dividends, interest and rents, they were held for years which suggests that disposals of individual investments were capital transactions rather than income-producing ones (para. 63 of the decision).

The direct and immediate link can be established in two ways:

  1. 1) by a link to a specific taxable supply or supplies (or other transaction that gives a right to deduct), or

  2. 2) by a link with the taxable person's economic activity as a whole.

In both cases, the link is that the costs of the input transaction are components of the cost or price of supplies by the taxable person that give rise to the right to deduct. In the case of input goods or services that are linked to a particular supply or supplies, the cost of the input transactions must be a component of the cost of the particular output transactions. Where the input goods or services were not linked to a particular supply or supplies, the necessary link to output transactions giving rise to the entitlement to deduct was established where the costs incurred to acquire the input goods or services were part of the general costs of the taxable person's overall economic activity (para. 66 of the decision).

In dismissing HMRC's appeal, the UT held that the University fell within para. 36 of the judgment in Kretztechnik AG v Finanzamt Linz ECASVAT(Case C-465/03) [2006] BVC 66, as applied in Skatteverket v AB SKF VAT(Case C-29/08) [2011] BVC 359. The question was whether the University's investment activity through the Fund was carried out for the benefit of the University's economic activity in general. If so, the costs of that activity formed part of the University's overheads and were therefore component parts of the price of its products. The University incurred costs in relation to an activity, namely investment, which was outside the scope of VAT. Accordingly, there were no supplies of investments to which the input transactions could be attributed. The FTT had found that the investment activity was not an activity carried out for its own sake, but for the benefit of the University's economic activity in general. Thus, the costs associated with that investment activity were part of the University's overheads (para. 69 of the decision).

Comment

The FTT had held that there was a link between running the University's Fund and its overall economic activity. Once this link had been established, the costs of managing the Fund were inevitably treated as partly attributable to the making of taxable supplies. In accordance with its partial exemption special method, the University could partly recover the disputed VAT.

DECISION
Introduction

[1] This appeal concerns a claim by the Respondents (“the University”) to deduct some of the VAT paid in respect of services supplied to the University by the fund managers of the Cambridge University Endowment Fund (“the Fund”). The claim related to two periods: the first from 1 April 1973 to 1 May 1997 and the second from 1 May 2006 to 31 January 2009. The Appellants (“HMRC”) refused the claim and the University appealed to the First-tier Tribunal (“the FTT”). The parties agreed that the only issue in the appeal before the FTT, and before us, was whether the fees should be characterised as overhead expenditure and attributable to the University's economic activity as a whole, which would allow the University to deduct a proportion of the VAT. In a decision released on 19 August 2013, [2013] TC 02836, (“the Decision”), the FTT (Judge Michael Connell and Mr James Midgley) held that, although it was a separate activity, the investment activity was not carried out for its own sake but was undertaken for the benefit of the University's other activities and allowed the appeal. HMRC now appeal, with the permission of the FTT...

To continue reading

Request your trial
6 cases

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT