University of Southampton v Revenue & Customs

For VAT purposes, publicly funded research is not automatically part of a university’s business merely because it uses the university’s staff, premises, infrastructure or reputation. The status of each research project is fact-dependent and must be assessed objectively in its institutional context.

Where research produces an identifiable result and is undertaken for its own purposes, its costs are not ordinarily overheads of the university’s other economic activities. Input tax on supplies used exclusively for that research is therefore irrecoverable. Supplies used partly for that research and partly for business purposes require apportionment under section 24(5) of the Value Added Tax Act 1994.

The University appealed against the decision of the VAT and Duties Tribunal dated 8 March 2005. The Tribunal had dismissed its appeal against an assessment of £1,598,366 relating to six accounting periods between October 2001 and January 2003.

The dispute concerned publicly funded research (“PFR”). The University argued that PFR formed part of its overall business, which included education, commercial research, intellectual-property exploitation, conferences, publishing and consultancy. The Commissioners considered that PFR was generally a separate non-business activity, subject to project-specific evidence.

The central issues were whether the Tribunal had erred in law under the principles in Edwards v Bairstow and whether inputs used for PFR were deductible as business inputs or as overheads of the University’s other activities.

1. The appeal was dismissed on the principal issue. The Tribunal was entitled to conclude that PFR did not form part of the University’s VAT business and was a separate activity from its economic activities, including education and commercial research.

2. The question whether a particular PFR project is an economic activity is fact-dependent. It must be assessed project by project, in the context of the university’s activities as a whole. Grant funding, common staff, premises, equipment, research standards, reputation, student recruitment and possible intellectual-property exploitation are relevant factors, but none is conclusive.

3. The objective character of economic activity does not exclude examination of the factual purpose and context of a project. A project may form part of the University’s economic activity where the facts show that it was undertaken solely to benefit an economic activity, such as a proposed commercial exploitation of intellectual property. The present evidence did not establish that position.

4. The reasoning in Kretztechnik AG v Finanzamt Linz concerned costs of an activity which, although not itself economic, were overheads of the taxpayer’s wider economic activity. It did not establish that every activity producing no supply is an overhead, nor that PFR was part of the University’s economic activity. PFR produced an identifiable result and advanced knowledge as an activity in its own right. Its costs could not realistically be treated as overheads of the University’s taxable or exempt supplies.

5. Accordingly, VAT on goods and services used exclusively for PFR was not deductible. VAT on goods and services used partly for PFR and partly for business purposes had to be apportioned under section 24(5) of the Value Added Tax Act 1994.

6. The Tribunal had not determined the subsidiary apportionment issue concerning the teaching element of the HEFCE grant. No determination was made on that issue.

• High Court (Chancery Division): the appeal from the VAT and Duties Tribunal was dismissed on the principal issue; no determination was made on the subsidiary apportionment issue.
• VAT and Duties Tribunal: by a decision dated 8 March 2005, the Tribunal dismissed the University’s appeal against the Commissioners’ assessment.