In “Sveda” UAB v Valstybinė mokesĉių inspekcija Lietuvos Respublikos finansų ministerijos3, a case referred from Lithuania, the CJEU has clarified the application of the “direct and immediate link” test for the deductibility of input tax in circumstances where the construction of a recreational path was provided to visitors free of charge.
Sveda UAB (Sveda) is a commercial company which provides accommodation, food and beverages, organises trade fairs, conferences and leisure activities, as well as the engineering and consultation associated with those activities.
In 2012, Sveda was working on the creation of a “Baltic recreational path”. The path was intended to entice visitors and improve access to one of Sveda’s retail outlets. However, Sveda could not afford the construction costs of the new path and so on 2 March 2012 it entered an agreement with the National Paying Agency under the Ministry of Agriculture (the Agency) to supply funding. Under this agreement, Sveda was required to provide the public with access to the recreational path free of charge. In return, the Agency agreed to reimburse up to 90% of the cost of the construction work, in the form of a “grant”. Sveda only had to suffer 10% of the cost, but reclaimed all of the input tax.
The Lithuanian tax authorities refused Sveda’s application to deduct all of the input tax as they considered there was no direct and immediate link between the costs and the retail activity of the outlet, as visitors could use the path free of charge. They also argued that as the company had only borne 10% of the cost, it could not reclaim all of the VAT.
Questions were referred by the national court to the CJEU, to determine whether, in the circumstances, there was a direct and immediate link between the expenses of the construction work and the planned economic activity of Sveda’s retail outlet.
The CJEU’s decision
The CJEU found in favour of Sveda and determined that all the VAT was recoverable.
In reaching this conclusion, the CJEU relied on the national court’s finding that the expenses were incurred ultimately with the intention of carrying out Sveda’s economic activities.
The recreational path was a means of attracting visitors with a view to providing them with goods and services.
The CJEU held that the fact the path was provided free of charge did not affect the existence of a direct and immediate link between the input and output transactions. They agreed with the earlier Advocate General opinion that the expenditure formed part of Sveda’s general costs and had a direct and immediate link with the economic activity as a whole. The path created better access to the retail outlet and there was therefore a direct and immediate link to the sale of goods and services which Sveda intended to provide. The source of the funding was irrelevant.
The CJEU considered that all of the VAT incurred on the costs was deductible provided that Sveda continued to use the path in connection with the shop.
HMRC have consistently maintained that input tax is only recoverable in circumstances where it is directly referable to the output transactions and so this decision will be welcomed by taxpayers. The CJEU has confirmed that the mere fact that costs have been financed by a grant has no bearing on whether input tax can be covered. The most important determinant for the deductibility of input tax is the overarching use of the expenditure and how this use is associated with supplies the taxpayer makes.
The CJEU’s decision is available to view here.