In HMRC v The University of Cambridge [2018] EWCA Civ 568, the Court of Appeal has decided to refer a number of questions to the CJEU, concerning whether a university was entitled to recover a proportion of input tax incurred on the payment of professional fees for the management of its endowment fund.

Background

The University of Cambridge makes two types of supplies: (i) exempt supplies of education; and (ii) certain taxable supplies consisting of commercial research, sales publications, consultancy services and other supplies. It receives donations, which it invests into its substantial endowment fund. The fund invested those monies in a range of securities which generated around £40m of income in each of the relevant years, covering 6% of the university’s total expenditure.

In 2009, the University submitted a claim for recovery of input tax of £182,501, on the basis that it should be treated as residual input tax and recoverable pursuant to the partial exemption special method.

The case concerned whether or not input tax incurred in relation to the management of an investment fund could be reclaimed even though it is agreed the investment is not carried out as an economic activity.

The First-tier Tribunal (FTT) and the Upper Tribunal (UT) both dismissed HMRC’s appeal and held that as the income realised from the fund was used to support the university’s economic activities, input tax associated with the professional management of this fund could be regarded as residual input tax. HMRC appealed to the Court of Appeal. It argued that the fees were directly and immediately linked to the non-taxable transactions carried out by the fund managers and could not therefore be an overhead for VAT purposes.

Court of Appeal’s decision

The Court of Appeal concluded that the issue was unclear and referred the matter to the CJEU.

The Court noted that both the FTT and UT had emphasised the purpose of the fund’s investment activity, which indicated they might have adopted a purely purpose-based test. However, the Court noted that such an approach was rejected by the CJEU in Sveda C-126/14. In addition, in the Court’s view, the UT had incorrectly relied on the decision in Kretztechnik AG C-463/03. Kretztechnik was concerned with activities designed to recapitalise a company, rather than to provide investment income as in the present case. In doing so, the UT failed to make any distinction between capital-raising and income-generating transactions.

The Court held that HMRC was correct to state that the generation of investment income by a taxpayer who was not carrying on a business dealing in shares was to be treated as outside the scope of VAT, because it was equivalent to a private owner disposing of his own property which was not an economic activity. However, the Court was nevertheless required to decide whether the use of the fund managers’ services to produce the income should be treated as consumed by the non-taxable activity they were involved in, or whether there was a sufficient link, for the purposes of Article 168 of Directive 2016/112, with the economic activities that the income subsidised. 

The Court considered recent judgments concerning input tax recovery, including Iberdrola C-132/16 and Sveda and the correct approach to be taken to the issue of attribution in the instant case. The Court concluded that the application of those judgments to the university’s situation was unclear. A non-business activity could, in principle, break the link that is necessary for input tax recovery. However, was ownership of the fund the relevant type of non-business activity? On that point the Court decided to seek the CJEU’s guidance. In particular, the Court sought guidance on whether it should look through the passive receipt of fund management services to the ultimate purpose of the services in supporting the university’s activity.

Comment

This outcome will be disappointing to partially exempt entities with similar types of investment funds that derive income or capital for the benefit of their overall economic activities. The reference to the CJEU will delay clarity in this important area.

It is interesting to note that neither party considered the relevant case law to be unclear and did not propose a reference to the CJEU. The Court of Appeal made this decision of its own volition.

A copy of the judgment is available to view here.