Commissioners for Her Majesty's Revenue and Customs v The Chancellor, Masters and Scholars of the University of Cambridge (Case C-316/18), 3 July 2019
The dispute in this case arose between the English tax authorities and the University of Cambridge, a non-profit educational institution which is exempt from VAT on its main activity but is subject to VAT on other transactions (e.g., research activities for commercial purposes, sale of publications, provision of advice, catering, accommodation and rental of facilities and equipment). The university was denied the right to deduct the VAT relating to the management costs of a fund collecting donations and endowments allocated to the financing of all its activities. The reason invoked by the English tax authorities was that the management fees were directly and exclusively attributable to the investment activity and did not constitute an element of the cost price of the goods or services subject to VAT supplied by the university. The latter, on the contrary, considered that these costs were overheads and as a consequence the university was eligible to at least a partial recovery of the VAT incurred.
Amongst the several questions referred to the Court of Justice by the English judge, the principal one was to determine whether it is possible, when costs are incurred first for the purposes of a financial transaction not subject to VAT, to establish a link between these costs and the economic activities which are then financed with the income generated by the financial operation. In other words, is it relevant to take into account the purpose for which the financial revenue generated is used to determine the deductible tax or is it required to only take into account the first operation (the financial operation)?
The ECJ rejected the position of the university. The expenses in question are not overhead costs but should instead be considered as exclusively related to the financial revenues generation. In this regard, the court noted that the university, in raising and collecting donations and endowments, does not act as a taxable person, since donations and endowments are made by third parties mainly for subjective, charitable and random reasons and are not the counterpart of any economic activity. For the ECJ, this was the same for the investment of these funds, which is only the direct extension of this non-economic activity. However, the court did not exclude the possibility that the costs may be deductible if they are included in the price of particular transactions carried out downstream by the taxable person. Having said that, the court noted that the costs in question were incurred in order to generate resources which were used to cover the costs of all downstream operations, thereby reducing the cost prices of the goods and services supplied by the university. For that reason they could not be considered a part of the cost price of the said operations and therefore did not form part of the overheads. The related VAT was therefore not deductible. The practical consequence of this decision is to be carefully monitored as investing money awaiting its employment is something quite usual for many businesses subject to VAT that are, in principle, entitled to recover all their input VAT.