In the Chancellor, Masters and Scholars of the University of Cambridge (C-316/18) the CJEU was asked whether the taxpayer should be allowed to recover input tax on costs incurred in connection with investment activities falling outside the scope of the VAT Directive, the income from which had been used to supplement the cost of a range of the University's exempt and taxable activities. In particular, the referring court asked whether any distinction should be made between intervening exempt supplies and nontaxable transactions when deciding whether such input tax had a direct link to the taxpayer's taxable economic activities.
The university taxpayer made exempt supplies of education and certain taxable supplies such as commercial research services, the sale of publications, consultancy services, the letting of facilities and accommodation. The taxpayer had a partial exemption special method to apportion its input tax between its taxable and exempt supplies.
The taxpayer's economic activities were financed partly through donations and endowments that were placed in a fund and invested. The fund was managed by a third party and the taxpayer incurred VAT on the management costs. It was accepted that the fund was passive and not making any taxable supplies. The UK tax authority refused to allow the taxpayer to recover the input tax on the management charges, on the basis that it was attributable to the investment activity, which was not an economic activity within the meaning of the Principal VAT Directive, and which did not have a direct link to the taxpayer's economic activities.
In the view of the CJEU, input tax paid in respect of any costs incurred in connection with the collection of donations and endowments was not deductible, regardless of the reason why those donations and endowments were received. The court said that the investment of donations and endowments and the costs associated with that activity must be treated in the same way as the collection of donations/endowments; investment was merely a direct continuation of the noneconomic activity of collecting donations. Accordingly, input tax on investment management costs was also nondeductible. The court said that there would be an exception to this bar on recovery if it could be shown that the input tax costs were incorporated into the price of a particular output tax transaction. On the facts of this case, there was no such incorporation, not least because the university was a nonprofit organization and the investment profits were used to lower its prices.
DLA Piper comment: This decision restricts the argument that input tax is recoverable where the overriding purpose of incurring the input tax costs is to support an economic activity, but the costs incurred have an immediate link with a nonbusiness activity. However, the CJEU made some odd comments, linking the passive activity of collecting funds to investment of funds. The court failed to clarify whether an intervening exempt supply and intervening noneconomic activities should be regarded the same. It should not, however, affect input tax recovery for those who carry on an economic activity and, for example, raise funds through the issue of shares (CJEU C-465/03, Kretztechnik: the issue of shares is not a supply and hence the taxpayer is entitled to recover the input tax on the related costs to the extent that its general business activities generated taxable supplies). But the distinctions are not clear.