The Commissioners for HMRC v University of Cambridge

VAT input tax is attributed by an objective direct-and-immediate-link analysis. The court must consider the objective content and all relevant circumstances, asking whether the cost is incorporated into a particular taxable supply or the taxable person’s economic activity as a whole. Subjective purpose or a merely causal connection is insufficient. A direct link to an exempt or non-taxable transaction breaks the VAT chain and makes the input tax irrecoverable. Nevertheless, expenditure connected with a non-taxable activity may, in an appropriate case, be linked to later taxable activity as a cost component or overhead. Whether investment-management fees used to generate income for wider activities satisfy that test was not acte clair and was referred to the CJEU.

HMRC appealed against the decision of the Upper Tribunal (Tax and Chancery Chamber), which had dismissed its appeal from the First-tier Tribunal. The First-tier Tribunal had upheld the University’s claim for recovery of VAT on professional management fees relating to its endowment fund: [2013] UKFTT 444 (TC). The Upper Tribunal dismissed HMRC’s appeal: [2015] UKUT 305 TCC.

The University’s investment activity was outside the scope of VAT. The issue was whether management fees connected only with that activity could nevertheless be treated as residual input tax because the investment income subsidised the University’s taxable and exempt activities. The central questions concerned the direct-and-immediate-link test and the treatment of exempt and non-taxable transactions.

1. The Court of Appeal did not finally determine whether the University could deduct the VAT. It concluded that the correct approach was not acte clair and proposed a reference to the CJEU under Article 267 of the TFEU.
2. Attribution of input tax depends on an objective economic link. The court must consider the circumstances and objective content of the input transaction. The expenditure may be linked to a particular taxable output or to the taxable person’s economic activity as a whole where it forms a cost component or overhead. Subjective purpose and a merely causal connection do not suffice.
3. The court accepted that a direct link between input expenditure and an exempt or non-taxable transaction makes the input tax irrecoverable. It considered that no distinction should be drawn between exempt and non-taxable transactions for that purpose.
4. That conclusion did not resolve whether expenditure factually attributable to a non-taxable activity could, in an appropriate case, be treated as linked to later taxable activity. The court treated the objective cost-component analysis in Sveda and Iberdrola as permitting that possibility. It also regarded capital-raising cases such as Kretztechnik as potentially distinguishable from continuing investment activity designed to generate income.
5. The unresolved issue was whether fees incurred solely for managing a non-taxable investment activity could be linked to the University’s wider economic activities, which were subsidised by the investment income. The parties were directed to assist in settling the terms of the proposed reference.

1. Court of Appeal (Civil Division) — concluded that the attribution issue was not acte clair and proposed a reference to the CJEU under Article 267 of the TFEU.
2. Upper Tribunal (Tax and Chancery Chamber) — dismissed HMRC’s appeal from the First-tier Tribunal: [2015] UKUT 305 TCC.
3. First-tier Tribunal — upheld the University’s appeal concerning recovery of the input tax: [2013] UKFTT 444 (TC).