On 27 March 2018, the Court of Appeal2 referred to the ECJ questions as to the ability of the University of Cambridge (University) to recover input VAT incurred in connection with the University’s investment activities.
At issue is the correct tax treatment of VAT which the University has paid in respect of the professional management of the Cambridge University Endowment Fund (Fund). The Fund invests donations and endowments which produces an income of over £40m per year, used by the University to support all of its activities.
Both the First-tier and Upper Tribunals, allowing VAT recovery, held that although the University’s investment activities did not of themselves amount to an “economic activity”, the professional fees incurred on such activities formed part of the University’s general overheads as those (out-of-scope) activities benefitted other (taxable, and non-taxable) activities. Accordingly, the earlier decisions had ruled that the VAT should be regarded as residual input tax and recoverable in accordance with the University’s partial exemption method. Two decisions of the ECJ3 were relied upon by the University in these earlier decisions.
HMRC, on the other hand, argued that the input tax relates solely to the investments held in the Fund and cannot be regarded as falling within the category of general overheads referable to other (taxable) parts of its activities.
The Court concluded that the correct approach on these facts was not sufficiently clear to preclude an ECJ reference. Specifically the Court proposed referring to the ECJ the questions:
• whether, where fees are incurred solely in relation to a non-taxable investment activity, it is possible to make the necessary link between those costs and the economic activities which are subsidised with the investment income which is so produced
• confirmation that the Court’s reading of the decision is Sveda is correct and accordingly that no distinction is to be made between exempt and non-taxable transactions for the purpose of deciding whether input tax is deductible.
A key issue for the ECJ to give a view on, is whether in this context income raised by investment should be treated as equivalent to the raising of capital.
The decision can be viewed here.