The Commissioners for HM Revenue and Customs v The Chancellor, Master and Scholars of the University of Cambridge
| Jurisdiction | England & Wales |
| Judge | Lord Justice Patten |
| Judgment Date | 27 March 2018 |
| Neutral Citation | [2018] EWCA Civ 568 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2015/2650 |
| Date | 27 March 2018 |
[2018] EWCA Civ 568
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL
(TAX AND CHANCERY CHAMBER)
Mr Justice Simon and Judge Greg Sinfield
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Patten
Lord Justice Sales
and
Lord Justice Lindblom
Case No: A3/2015/2650
Mr Kieron Beal QC and Mr Sarabjit Singh (instructed by General Counsel and Solicitor to HMRC) for the Appellants
Mr Andrew Hitchmough QC and Ms Barbara Belgrano (instructed by The University of Cambridge) for the Respondents
Hearing dates: 13 and 14 December 2017
Judgment Approved
This is the judgment of the Court.
The University of Cambridge is a charity which provides exempt supplies of education to its undergraduate and post-graduate students. It also makes a number of taxable supplies which include commercial research, the sale of publications, consultancy services, catering, accommodation and the hiring of facilities and equipment. The input tax which it incurs as part of its expenditure in connection with these and its other activities includes an amount of residual input tax that is not exclusively attributable to either the taxable or the exempt supplies of services which the University makes.
In relation to residual input tax, the University is entitled under Article 173 of the Principal VAT Directive (2016/112/EC) (“PVD”) to deduct such proportion of the tax as is attributable to the taxable transactions. The apportionment of the input tax which this necessitates has been carried out in accordance with a partial exemption special method (“PESM”) approved by HMRC under the powers contained in regulation 102 of the Value Added Tax Regulations 1995 (SI/19095/2518) which give effect to the right of member states (in accordance with Article 173 PVD) to derogate from the standard turnover method of apportionment. The PESM used in this case is known as the CVCP Agreement (the Committee of Vice Chancellors and Principals).
This appeal concerns the correct tax treatment of VAT which the University has paid in respect of the professional management of the Cambridge University Endowment Fund (“the Fund”). The University pays into the Fund donations and endowments which are then invested. The evidence is that as at 31 July 2007 the Fund had a value of about £991m made up of UK and overseas equities, fixed interest holdings, cash, property and private equity. The Fund produces an income of over £40m per year which is used by the University to support all of its activities. It meets about 6% of the University's operational expenditure.
Since 1988 the Fund has been managed in the UK by Foreign and Colonial Management Limited (“F&CM”) which under its letter of engagement provides management on a full discretionary basis. F&CM calculates and charges its fees as a percentage of the total value of the Fund. Some of the fees are subject to VAT at the standard rate.
Historically the VAT incurred on the management fees was not included as residual input tax under the PESM. An earlier claim was made in 2002 but then abandoned. But in March 2009 the University made a claim to include the VAT as residual input tax for the periods 1 April 1973 to 1 May 1997 and 1 May 2006 to 31 January 2009 on the basis that the income generated from the Fund's investment activities had been used to defray the cost of the whole range of the University's activities including the supply of both taxable and exempt services as well as activities that did not constitute economic activities for VAT purposes and were therefore non-taxable. It claimed repayment of input tax amounting to £182,501.
It is common ground that the investment activity carried out by the managers of the Fund on behalf of the University is not in itself an economic activity so that the transactions carried out by the Fund are outside the scope of VAT. No input tax in the form of VAT payable on the management fees would therefore be recoverable if the fees must be treated for VAT purposes as directly and exclusively attributable to the investment activities themselves. But it was contended by KPMG LLP on behalf of the University that the purpose of the Fund was to generate income to be used to support the general activities of the University (including the taxable and exempt activities we have mentioned) and that the VAT incurred on the fees should therefore be treated as residual input tax in accordance with the PESM.
To support this argument particular reliance was placed on two decisions of the CJEU: C-465/03 Kretztechnik AG v Finanzamt Linz [2005] STC 1118 and C-37/06 Securenta Göttinger Immobilienanlagen und Vermögensmanagement AG v Finanzamt Göttingen [2008] All ER (D) 182 (Mar) where the taxpayer was successful in being able to deduct the VAT relating to the issue of shares on the basis that they were directly linked to or cost components of its taxable activities. In each case this required the Court to look beyond the share issue itself and to treat the expenditure and the VAT on it as attributable to the wider activities which the share issue was intended to finance.
The Commissioners rejected the University's claim but it was upheld by the First-tier Tribunal on appeal. Its conclusions are set out in [78]–[80] of its decision released on 19 August 2013: see [2013] UKFTT 444 (TC):
“78. The purpose of a particular activity, and in this case the Appellant's investment activity which was 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. The professional management and other costs associated with the investment activity formed part of the component parts of the Appellant's supplies. Although there were separate activities, the investment activity was effected for the benefit of the Appellant's other activities. There cannot be any other conclusion if the investment activity was not something which was carried on for its own sake. The costs of the investment activity were incurred solely for the benefit of the Appellant's economic activity in general, and objectively were not incurred for the purpose and benefit of its non-economic investment activity.
79. In BLP the ultimate reason for the taxable supplies was the carrying out of a taxable transaction but this was only relevant because it related to an activity which the Appellant agreed was exempt. In that case the Appellant asked the court to “look through” an objective analysis of the cost of those taxable supplies to the ultimate intention of the tax-payer. Here they do not. We do not accept that it is necessary for the Appellant to demonstrate that the professional management fees burden onlythe cost of the economic activity. The investment activity was not an activity carried out for its own sake. Although the investment activity was a separate activity it was undertaken for the benefit of the Appellants other activities. Whether the investment activity operated as a subsidy or the costs thereof constituted an overhead is not in our view relevant.
80. We agree with the Appellant that Kretztechnik has a wider application than that asserted by the Respondents. There is clearly a link between the Appellant's investment activity and its overall economic activity. Costs associated with the investment activity were in reality components of the price of the Appellant's research and publications on the one hand and educational and other exempt activities on the other. The fact that the investment activity may have raised, primarily, income rather than capital is in our view of no relevance.”
The Upper Tribunal (Tax and Chancery Chamber) (Simon J and Judge Greg Sinfield) in a decision released on 9 June 2015 dismissed the Commissioners' appeal: see [2015] UKUT 0305 TCC. Having reviewed the relevant authorities, they said:
“69. In our view, the University falls squarely within paragraph 36 of the ECJ's judgment in Kretztechnik, as applied in SKF. The question to be asked in this case is 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 form part of the University's overheads and are therefore, as such, 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 found, in [78] and [79], 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. It follows that the costs associated with that investment activity were part of the University's overheads and, as such, deductible in accordance with the CVCP Agreement.”
The Statutory Context
Article 2(1) of the PVD imposes VAT on:
“(a) The supply of goods for consideration within the territory of a member of state by a taxable person acting as such;
(b) The supply of services for consideration within the territory of a member of state by a taxable person acting as such.”
“Taxable person” is defined in Article 9(1) as:
“any person who, independently, carries out in any place any economic activity, whatever the purpose of that activity.”
Article 2 of the First...
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