The Commissioners for HMRC v University of Cambridge

This is the judgment of the Court.

The University of Cambridge is a charity which provides exempt supplies of education to its undergraduate and post-graduate students. It also makes a number of taxable supplies which include commercial research, the sale of publications, consultancy services, catering, accommodation and the hiring of facilities and equipment. The input tax which it incurs as part of its expenditure in connection with these and its other activities includes an amount of residual input tax that is not exclusively attributable to either the taxable or the exempt supplies of services which the University makes.

In relation to residual input tax, the University is entitled under Article 173 of the Principal VAT Directive (2016/112/EC) (“PVD”) to deduct such proportion of the tax as is attributable to the taxable transactions. The apportionment of the input tax which this necessitates has been carried out in accordance with a partial exemption special method (“PESM”) approved by HMRC under the powers contained in regulation 102 of the Value Added Tax Regulations 1995 (SI/19095/2518) which give effect to the right of member states (in accordance with Article 173 PVD) to derogate from the standard turnover method of apportionment. The PESM used in this case is known as the CVCP Agreement (the Committee of Vice Chancellors and Principals).

This appeal concerns the correct tax treatment of VAT which the University has paid in respect of the professional management of the Cambridge University Endowment Fund (“the Fund”). The University pays into the Fund donations and endowments which are then invested. The evidence is that as at 31 July 2007 the Fund had a value of about £991m made up of UK and overseas equities, fixed interest holdings, cash, property and private equity. The Fund produces an income of over £40m per year which is used by the University to support all of its activities. It meets about 6% of the University’s operational expenditure.

Since 1988 the Fund has been managed in the UK by Foreign and Colonial Management Limited (“F&CM”) which under its letter of engagement provides management on a full discretionary basis. F&CM calculates and charges its fees as a percentage of the total value of the Fund. Some of the fees are subject to VAT at the standard rate.

Historically the VAT incurred on the management fees was not included as residual input tax under the PESM. An earlier claim was made in 2002 but then abandoned. But in March 2009 the University made a claim to include the VAT as residual input tax for the periods 1 April 1973 to 1 May 1997 and 1 May 2006 to 31 January 2009 on the basis that the income generated from the Fund’s investment activities had been used to defray the cost of the whole range of the University’s activities including the supply of both taxable and exempt services as well as activities that did not constitute economic activities for VAT purposes and were therefore non-taxable. It claimed repayment of input tax amounting to £182,501.

It is common ground that the investment activity carried out by the managers of the Fund on behalf of the University is not in itself an economic activity so that the transactions carried out by the Fund are outside the scope of VAT. No input tax in the form of VAT payable on the management fees would therefore be recoverable if the fees must be treated for VAT purposes as directly and exclusively attributable to the investment activities themselves. But it was contended by KPMG LLP on behalf of the University that the purpose of the Fund was to generate income to be used to support the general activities of the University (including the taxable and exempt activities we have mentioned) and that the VAT incurred on the fees should therefore be treated as residual input tax in accordance with the PESM.

To support this argument particular reliance was placed on two decisions of the CJEU: C-465/03 Kretztechnik AG v Finanzamt Linz [2005] STC 1118 and C-37/06 Securenta Göttinger Immobilienanlagen und Vermögensmanagement AG v Finanzamt Göttingen [2008] All ER (D) 182 (Mar) where the taxpayer was successful in being able to deduct the VAT relating to the issue of shares on the basis that they were directly linked to or cost components of its taxable activities. In each case this required the Court to look beyond the share issue itself and to treat the expenditure and the VAT on it as attributable to the wider activities which the share issue was intended to finance.

The Commissioners rejected the University’s claim but it was upheld by the First-tier Tribunal on appeal. Its conclusions are set out in [78]-[80] of its decision released on 19 August 2013: see [2013] UKFTT 444 (TC):

The Upper Tribunal (Tax and Chancery Chamber) (Simon J and Judge Greg Sinfield) in a decision released on 9 June 2015 dismissed the Commissioners’ appeal: see [2015] UKUT 0305 TCC. Having reviewed the relevant authorities, they said:

Article 2(1) of the PVD imposes VAT on:

“Taxable person” is defined in Article 9(1) as:

Article 2 of the First Council Directive of 11 April 1967 (67/227/EEC) referred to the right of the taxable person to deduct the amount of VAT “borne directly by the various cost components” but Article 168 of the PVD (which replaced Article 17 of the Sixth Directive 77/388/EC) confirms the right to deduct input tax on expenditure:

Article 173 provides (so far as material) that:

These provisions of the PVD are given domestic effect by VATA 1994 which provides:

The rationale of this system of deduction is the principle of fiscal neutrality which, as a general rule, requires the burden of the tax to fall on the ultimate consumer and therefore relieves traders of any intermediate tax burden incurred in connection with the relevant taxable supplies which they make. In Case C-268/83 Rompelman v Minister van Financiën [1985] ECR 1409 the CJEU said:

Consistently with this principle, the VAT on a taxable supply of goods or services which is made to the trader to facilitate an exempt onward supply will not be deductible and in Associated Newspapers Ltd v HMRC [2017] EWCA Civ 54; [2017] STC 843 this Court decided on the basis of various more recent decisions of the CJEU (which we will come to) that the same would also follow in cases where the relevant output supply was not an economic activity for VAT purposes and was not therefore taxable. These principles are relatively easy to apply if one analyses the transactions involved as a linked series of supplies each connected to the other in a line. Provided that each successive transaction is taxable, the liability to VAT can be passed down the chain to the ultimate consumer by the system of deducting input tax provided for under PVD Article 168. If the next supply in the chain is an exempt or non-taxable supply the chain is broken and the recipient of the last taxable supply of goods or services must bear the tax in effect as the ultimate consumer.

The difficulty, however, with the model described above is that it excludes the recovery of VAT unless the input tax and the supply it relates to is expenditure which relates directly and exclusively to a particular output supply. Most businesses will involve expenditure on overheads such as staff costs, travel, marketing and legal and accounting expenses which are necessary for the running of the business but cannot be linked exclusively to any of the specific supplies which it makes in the course of its economic activities. In such cases the residual input tax is deductible because (as an expense of the taxpayer’s economic activity as a whole) it is treated as used for the purposes of the supplies which the supplier makes (in the sense that it is a cost component of those supplies) subject to agreement on a suitable PESM to apportion the VAT between taxable and exempt supplies in accordance with Article 173.

The correct tax treatment of the VAT on expenditure by a taxable person will therefore depend on whether the input supply of goods or services should be treated as directly (and exclusively) related to a particular output supply or falls to be treated as part of the overheads of the business. Moreover, even if the expenditure cannot by its nature be said to be part of the general expenses of running the business, an argument has sometimes arisen as to which of a number of output supplies (some taxable, some exempt or non-taxable) it is objectively connected. Some of the reasoning which this has involved is highly abstract and the present case raises a number of these issues. The University contends that the management of the Fund was not an end in itself and would not have been carried out but for the purpose of generating income for use in the subsidy of the whole range of the University’s economic (and non-economic) activities which included the making of taxable supplies. The fees involved should therefore be treated as part of its overheads and dealt with as residual input tax under the PESM. The Commissioners say that the fees are directly and immediately linked to the non-taxable transactions carried out by F&CM and cannot therefore be an overhead for VAT purposes. In putting the argument in this way it can be seen that the issue goes beyond a mere question of classification and involves a consideration of the proper interaction or operation of the two lines of reasoning which the CJEU has developed to deal with the deductibility of input tax in such circumstances. The issue in all these cases is one of attribution. What are the criteria by which one judges whether the relevant expenditure and therefore the input tax which it bears is recoverable by a taxable person whose activities include but are not exclusively composed of taxable transactions? As in other branches of the law, the test which the courts have applied to determine this issue is essentially a legal construct which explains the abstract language used and the difficulties involved in its application to particular factual circumstances.

The decisions of the Court of Justice indicate that the test has developed over time but continues to centre on establishing by objective means an economic link between the expenditure and some form of economic activity on the part of the taxpayer consisting of the taxable supply of goods or services. In a typical case there will usually be the potential for a different tax treatment in terms of the recoverability of the input tax depending on whether for VAT purposes one links the input expenditure to a more temporarily proximate supply or activity which is exempt or non-taxable (the investment trades carried out by the Fund in this case) or looks beyond that to the ultimate use of the income which the investment activity generates. In purely causative terms both are possible but the choice between them may depend on more general policy considerations which require that the VAT system should preserve the principle of fiscal neutrality and attempt so far as possible to eliminate any intermediate tax burden where some kind of link can be made between the original expenditure and the ultimate economic activity which the taxpayer carries out. On that basis the correct approach could be to treat all VAT bearing expenditure as related for the purposes of Article 168 to the overall economic activity of the taxpayer in the absence of some particular factor which makes that analytically impossible. An example of this which features in some of the cases would be where the expenditure post-dates the making of the only relevant taxable supply or where it is incurred some time prior to the commencement of any economic activity and would have been incurred regardless of whether that economic activity ever took place.

We can turn then first to the decisions of the Court of Justice. The obvious starting point is the decision in Case C-4/94 BLP Group v Customs and Excise Commissioners [1995] STC 424. BLP sought to deduct input tax which it had incurred on professional services in connection with the sale of the shares in a German subsidiary. The share sale was an exempt transaction but the taxpayer contended that its purpose was to raise capital in order to pay off debts which had been incurred in connection with its taxable activities. It contended that had it taken out a loan in order to pay off the debts then the VAT on the professional services involved would have been recoverable as part of its overheads. The CJEU held that the input tax was not deductible:

The decision in BLP is based on looking at the expenditure in transactional terms without regard to the wider purpose or intention behind the expenditure. The reference to the “ultimate aim” of BLP being irrelevant is relied on by the Commissioners in this appeal as an answer to the University’s argument that the purpose of the transactions carried out by F&CM was to support the wider activities of the University and that the transactions should not be treated for tax purposes as an end in themselves. But the decision is also, we think, important for its rejection in [25] of the possibility that services used in connection with the share sale could be treated as overheads of the company’s business as they would have been had BLP chosen to re-capitalise itself by borrowing money. This suggests that the CJEU thought that professional services linked to the share sale could not for that very reason be treated as a cost component of the taxpayer’s business more generally. This kind of structural analysis is the line of reasoning which the Commissioners advance in the present case. One can also see it in the Opinion of Advocate General Lenz in BLP where he says:

In BLP the invoices for the accountants’ services indicated in terms that they had been provided in connection with the sale of the shares. The Upper Tribunal in the present case attached some importance to the fact that F&CM provided general investment management services and not merely services related to the disposals of the investments. Most of the investment activity they carried out was not trading as such because the Fund had a large portfolio of investments in publicly quoted companies which were not actively traded but rather were held for significant periods of time. F&CM’s fees were also, as we have said, annual fees based on the value of the Fund rather than transaction specific fees. These factors, the Upper Tribunal said, pointed in favour of treating the fees as overheads rather than cost components of the prices at which the investments were sold which depended, of course, on their market value. Against this, however, is the fact that the fees charged were nevertheless for the services which F&CM performed in relation to the investment activities which they carried out on behalf of the Fund. Even if they were not transaction specific they had no other purpose. And those activities were not economic activities for the purpose of VAT.

The next relevant case in point of time is Case C-98/98 Midland Bank plc v Customs and Excise Commissioners [2000] STC 501. It concerned the recovery of VAT on solicitors’ fees charged to Samuel Montagu & Co Ltd (a company in the Midland Bank group) which acted as merchant bank for a client in a takeover bid. The bid resulted in an agreed takeover of the target company but there was litigation including a claim against Samuel Montagu which arose out of the takeover agreement. Samuel Montagu claimed to recover the VAT on the solicitors’ fees on the basis that the expenditure should be treated as exclusively connected to the banking services it provided on the takeover. The Commissioners maintained that the legal services were not used solely for that purpose but related to the business of the bank more generally which included the making of both taxable and exempt supplies of services. One of the difficulties with the taxpayer’s argument was that the banking services it had rendered to its own client pre-dated the litigation and the solicitors’ involvement in it. The CJEU said:

The issue of whether the management fees in this case should be treated as linked directly and immediately to the activities of the Fund or regarded as cost components of the University’s business as a whole cannot be resolved as easily as in Midland Bank. We are not dealing here with costs which by their very nature (e.g. stationery or secretarial services) are general costs of the taxpayer’s business. The fees were incurred for the management of the Fund and can only be linked to the activities and business of the University more generally if it is permissible to regard the cost of the input transactions (i.e. the management services) as attributable to the economic activities which the Fund was established to support. If one wants to use the structural metaphor employed in some of the cases, it involves ignoring the non-taxable transactions comprised in the Fund’s investment activities in favour of further or other links in the chain made up of the taxable services which the University itself supplies. If the analysis in BLP applies, this is impermissible.

In Case C-408/98 Abbey National plc v Customs and Excise Commissioners [2001] STC 297 the taxpayer company sought to deduct the VAT on professional fees which it had incurred in connection with the sale of various leasehold properties. For VAT purposes the sale was treated as the transfer of a going concern so that no VAT was payable in respect of it. The taxpayer (as in the present case) claimed to deduct the VAT as part of the residual input tax relating to the general overheads of its business. In his Opinion Advocate General Jacobs referred to the decision in BLP and the test based on a direct and immediate link and contrasted it with what he called the broader approach which the CJEU had taken in cases like Leesportefeuille 'Intiem' CV v Staatssecretaris van Financiën (Case 165/86: [1988] ECR 1471) where the right to deduct input tax was said to apply to “goods and services connected with the pursuit of the taxable person’s business”. At [35] he said:

The Court in its judgment did not in terms adopt the structural test which the Advocate General had used and, in particular, the bypass he advocated in cases where the next link in the chain was a non-taxable as opposed to an exempt supply. It held that the professional services used in what amounted to a transfer of the activity could not be treated as part of the costs of any specific taxable output transactions which would make the input tax recoverable. But it accepted that the costs of the services could nevertheless be treated as part of Abbey National’s overheads and so were cost components of the products of a business:

The decision is therefore important not so much for what it says about the recovery of inputs in relation to a non-taxable activity but for the Court’s acceptance that the inability to link the expenditure with a particular taxable output transaction (in this case because that transaction was non-taxable) is not a bar in itself to being able to characterise the expenditure as an overhead of the business. It is not clear whether the Court based this on a distinction between the effect of an exempt and a non-taxable supply suggested by the Advocate General but, if not, then the principle is not easy to reconcile with the Court’s reasoning in BLP where the link of the services to an exempt supply seems to have precluded any recovery of the expenditure as an overhead of the business. In Abbey National the professional fees were specifically incurred in relation to the sale of the leasehold interests just as in BLP they were incurred in relation to the sale of the shares.

We can turn now, chronologically, to the first of the two decisions which were relied on by the Upper Tribunal in this case in support of their view that the management fees were part of the general overheads of the University. This is Kretztechnik. The taxpayer company which developed and distributed medical equipment sought a listing on the Frankfurt Stock Exchange in order to raise capital by the issue of shares. The issue of shares was a non-taxable transaction in Austria and the company’s claim to deduct the VAT on the expenses incurred in connection with its listing on the Exchange was refused by the tax authorities. A reference was made (inter alia) in relation to whether the VAT on the fees (which related to advertising, agent’s fees and legal and technical advice) had been used for the purpose of the company’s taxable transactions. The referring court had found that the costs of these services were attributable exclusively to the listing for the purpose of the share issue. In his Opinion Advocate General Jacobs made no reference to the earlier cases but concentrated on whether the inputs were linked (for VAT purposes) not to the share issue itself but to the purposes for which capital was sought to be raised:

The Court took a similar view:

The decision in Kretztechnik was undoubtedly based in part on the view that a non-taxable transaction was irrelevant and could be ignored in determining which output supplies the fee and other expenditure were linked to for the purpose of deducting input tax. One can see this in the first sentence of [36] which is a reference back to what the Advocate General says in [74] of his Opinion. If one excludes the share issue as a relevant supply it is obviously much easier then to determine a link with the taxpayer’s economic activity that the share issue was intended to finance. But it does not follow that the result would have been the same had the share issue (as in BLP) been an economic activity but exempt. What Advocate General Jacobs says in [38] of his Opinion in Abbey National suggests that he would have regarded the costs as irrecoverable in those circumstances. The Commissioners’ argument is that more recent decisions have now equated the position of non-taxable transactions with exempt transactions and that the same result must therefore follow.

Next in point of time is Case C-435/05 Investrand BV. v. Staatssecretaris van Financiën [2007] ECR 1315. In 1989 the taxpayer company sold a 43.57% holding in a subsidiary for a fixed sum together with a share of future profits. There was a subsequent dispute about the calculation of this sum for the year 1992 which was referred to arbitration and the company (in 1996) sought to deduct the VAT on the professional fees connected with the arbitration. The significance of 1996 was that until 1993 the company was a passive investment vehicle but from 1993 onwards it began to carry out management services for the company in which the holding had been sold. The referring court sought guidance on whether the right of deduction under Article 17(2) would operate in cases where the input services were rendered prior to the commencement of any economic activity by the taxpayer. The Court of Justice said that the input tax could not be linked to the share sale because that was not an economic and taxable activity under Dutch law. But it also held that they could not be treated as overheads because when incurred they were not cost components of the taxpayer’s economic activity as a whole:

Much of the Court’s legal analysis takes the same form as in Kretztechnik and the fact that the Court dispensed with the need for an Opinion from the Advocate General confirms that they did not consider that the case involved any new questions of principle. But the test of causation used in [32] to determine the absence of any relationship between the professional services and the much later taxable activities of the company has some relevance to part of the University’s argument in the present appeal (accepted by the Upper Tribunal) that the management of the Fund did not satisfy a purpose in itself. The University contends that the only purpose of the Fund was to generate income for its activities as a whole and that the Fund would not operate but for those activities.

This brings us to Securenta, the second of the two share issue cases on which the University relies. It was another case concerned with the raising of capital by the issue of shares. The business of the taxpayer company consisted of the acquisition, management and sale of real property, securities and other investments. The claim to deduct the VAT on the expenses in connection with the share issue was based on an argument that the share issue raised capital for the benefit of the company’s economic activity in general: the same argument as in Kretztechnik. The German tax authority did not contend that the totality of the expenditure was linked exclusively to the issue of the shares so that the issue which came to the CJEU was not whether that was precluded by the share issue being an exempt supply. It concerned the correct method of apportionment of the input tax under Article 17(5) given that the company’s general business involved both economic and non-economic activities. The decision therefore adds nothing of substance to what was said in Kretztechnik.

Of more interest is Case C-29/08 Skatteverket v AB SKF [2010] STC 419 where a Swedish taxpayer company, SKF, sought a preliminary decision from the Swedish tax authorities as to whether it was entitled to deduct input tax on the professional fees for a valuation of the shares in two companies (one a subsidiary and one a former wholly owned subsidiary) which SKF wished to dispose of as part of the re-financing of the group. It relied on the fees as attributable either to the taxable management services it had provided to the subsidiaries or to its general overhead expenditure. The sale of the shares (like the sale of the leases in BLP) was treated by Advocate General Mengozzi in his Opinion as an exempt rather than a non-taxable supply which led him to consider whether on the authorities this created a difference in the tax treatment of inputs depending on which of the two they could be said to be linked to. The referring court had found that the valuation costs were directly linked to the sales of the shares in each company. The case was, he observed, similar in that respect to the position in BLP which in his view was determinative of the reference. It was not possible in the case of an input supply which was directly linked to an exempt supply as in BLP to argue in the alternative that the input costs could be treated as part of the taxpayer’s general overheads on the basis that their purpose was to raise finance for the general business of the company. Subsequent decisions such as Kretztechnik had, he said, recognised this possibility only where the most directly linked output transaction fell outside the scope of VAT and was therefore neither a taxable nor an exempt supply:

The Court, however, took a different view. Its principal reason for rejecting a difference of approach between services provided in relation to share sales that were exempt and those which were non-taxable ones was that it could result in a difference in the tax treatment of similar transactions and breach the principle of fiscal neutrality:

It is significant in our view that fiscal neutrality is achieved by giving the input tax the same favourable treatment as it would have been given in the case of a non-taxable supply and not the other way round. But there is nothing in SKF to suggest that output supplies which are non-taxable should be treated as having the same magnetism and chain breaking effect as Advocate General Jacobs attributed to an exempt supply and it seems to be implicit in the Court’s reasoning that it accepted the distinction made by the Advocate General between the effect of exempt and non-taxable supplies. Had its starting point been that no material distinction existed between the two for the purpose of applying the direct and immediate link test then the point about the difference in tax treatment of the consultancy services would not have arisen.

The CJEU returned to some of these issues in Case C-126/14 'Sveda' UAB v Valstybine mokesčių inspekcija prie Lietuvos Respublikos finansų ministerijos. The claim in that case was to recover input tax on the supply of goods which had been purchased in connection with the construction of a ‘Baltic mythology recreational and discovery path’. The project had been subsidised by the Lithuanian State in order to ensure that access to it was free of charge but Sveda did intend to carry out economic activities at the site in the form of the sale of food and souvenirs. Since its cost was subsidised and access was free, the construction and operation of the discovery path was not in itself an economic activity but the sales which Sveda proposed to carry out on the premises undoubtedly were. Once again the question was whether Article 168 enabled the input costs to be linked to and treated as part of the costs of Sveda’s economic activity.

In her Opinion Advocate General Kokott referred to the decision in BLP and to the rejection in that case of the relevance of the aim or purpose of the transaction as a determinant of the output supplies to which the inputs were directly related. But she continued:

The Advocate General spends some time developing an analysis of the link between the input and any output supplies in terms of whether, viewed objectively, the input expenditure can be regarded as incorporated into the cost of either individual output transactions or of all the goods and services supplied by the taxable person. This, she said, was determined not by the intention of the taxable person in incurring the expenditure but by what she refers to as the objective content of the input supplies:

The Court largely adopted the approach based on this concept of the objective content of the transaction in question. It recognised that VAT on expenditure which is incurred with the intention and in order to engage in future economic activity was recoverable as part of the start-up costs of a business even though the goods and services acquired are not used immediately for the purpose of that activity. But where (as in most of these cases) the business is already established and the Court must determine whether input expenses are linked to a more immediate exempt or non-taxable supply or to the economic activity which results from that then the cost component test comes to be applied:

As I indicated in [47] of my judgment in Associated Newspapers, the Court seems to have rejected the view expressed by Advocate General Jacobs that a non-taxable transaction can be ignored in determining the output supply to which the expenditure is directly linked for the purposes of Article 168. We therefore accept the submission of the Commissioners that a finding of a direct link to such a supply will render the input tax irrecoverable just as in the case of an exempt output supply. But the decision also, we think, confirms that in appropriate cases expenditure which is factually attributable to a more immediate (non-taxable) activity such as the creation of the free discovery path facility can for VAT purposes be treated as linked to the economic activity which will follow. It appears from the judgment in Sveda that this falls to be determined not by reference to what might be said to be the purpose of the expenditure because that approach was rejected in BLP and that question is in any case capable of more than one answer depending on how wide a view of the consequences of the transaction one takes. On one view the construction of the path in Sveda was the purpose behind the expenditure. Nor is it resolved simply by establishing a causal connection. Instead the question seems to be whether one can link the expenditure to the ultimate economic activity by treating it as a cost component of a specific taxable supply or as an overhead of the business, i.e. are the costs incorporated in the cost of the taxpayer’s economic activities to use the test suggested by the Advocate General.

To complete the review of the CJEU authorities, we come to Case 132/16 Iberdrola Inmobiliaria Real Estate Investments EOOD [2017] All ER (D) 114 (Sep). It concerned the reconstruction by the taxpayer company for a local authority of a sewage pumping station as what amounted to a condition of being able to obtain planning permission for a development of some 30 apartments within the vicinity. On completion of the work to the pumping station Iberdrola was permitted to connect the apartments to the station. Expert evidence was given to the referring court that without the reconstruction of the pumping station it would not have been possible to connect the development to the station because the existing sewer and drainage system were inadequate. Iberdrola sought to deduct the input tax on the cost of the works to the pumping station as a cost component of the taxable supplies which it made as part of its subsequent housebuilding activity. This was resisted by the tax authority on the basis that the relevant input costs were related to the construction works to the pumping station which were provided free of charge to the municipality even though they also served to unlock the development of the apartments.

The CJEU adopted the same reasoning as in Sveda , holding that input tax was irrecoverable if directly linked to either an exempt or a non-taxable transaction and that in applying the direct link test national courts should consider and take account only of the transactions which are objectively linked to a person’s taxable activity:

It can be seen from these paragraphs that a particular complication in Iberdrola was that the local municipality rather than the taxpayer or its customers benefited from the works to the pumping station in that it was owned and operated by the municipality for waste water disposal. This persuaded the Advocate General to distinguish the facts from Sveda and to conclude that the provision of the services free of charge to a third party meant that the input tax was irrecoverable. The Court, however, rejected this by applying a but-for test of causation to the works themselves and ruling that the benefits received from the works by the municipality did not prevent the costs associated with the works being attributable to the housing development which the reconstruction of the pumping station facilitated.

Mr Beal QC for the Commissioners emphasises that the facts set out in the evidence and as found by the First-tier Tribunal in this case were that F&CM were remunerated by reference to the value of the Fund and that the input tax relates wholly to investments held in the Fund. The purpose of the investment is to generate funds to be deployed across the University to support its operational running costs. If the University had operated in relation to the Fund as a commercial dealer in bonds or shares then that would have been treated as an exempt economic activity under PVD Article 135(1)(f): see Case C-80/95 Harnas & Helm v Staatssecretaris van Financiën [1997] ECR I-745, CJEU. But an ordinary investor in shares and bonds does not carry out any economic activity and therefore operates outside the scope of VAT. Any input tax incurred by him on consultancy fees in connection with his investment activities will therefore, without more, be irrecoverable. An institutional investor is treated as a private investor unless it deals in shares or bonds on a commercial basis or unless they qualify as a special investment fund for the purposes of PVD Article 135(1)(g) in which case the transactions they carry out would be economic activity but exempt. Because the University in this case is treated as a private investor, the investment activities it conducts are outside the scope of VAT but, in the light of Sveda, this makes, Mr Beal submits, no difference. In both cases the input tax is irrecoverable and cannot be treated as part of the University’s general overheads in relation to other taxable parts of its activities.

This part of the Commissioners’ argument on attribution relies on BLP but with the important rider that in the light of subsequent developments in the law, no distinction is to be made between an exempt and a non-taxable supply for this purpose. The question therefore becomes (as in Sveda and the other authorities we have referred to) whether the input expenses which were incurred solely in connection with the non-taxable supplies comprised in the investment activities should be treated for VAT purposes (as described in Sveda) as objectively linked to the University’s activities as a whole and treated as an overhead. It is not suggested in this case that they can be linked directly and exclusively to any particular taxable output supply.

The Commissioners submit that they get some assistance for their analysis from Case C-155/94 Wellcome Trust Limited v CCE [1996] 2 CMLR 909 where the Court decided that the Wellcome Trust was not entitled to deduct the input tax on professional fees incurred in connection with the sale of some of its shares in order to fund medical research because, like the University in this case, it fell to be treated as a private investor whose activities amounted to the exercise of rights of ownership and were not therefore taxable. This, the Court said, was in contrast to the commercial share dealer who carried out the sales and acquisitions in order to establish a direct or indirect involvement in the management of the relevant company. In Wellcome Trust the input expenditure was treated as fully consumed by the non-taxable investment activity itself and Mr Beal submits that the position is no different here. Whilst it is true that the income generated by the Fund as a result of the investment activities is used to subsidise the carrying on of the wider activities of the University, it is not in any sense a cost component of those activities. The net income from the Fund enables the University to use it to subsidise its other activities but the costs incurred on management services are not used as such to enable the University to carry them out. They simply pay for the management of the Fund and enable its income to be produced. They can be characterised as a charge on the Fund: but not on the economic activity whose costs the Fund is then used to defray. It is a matter for the University to decide how to use the income it receives.

One particular aspect of this case, much relied on by Mr Beal in his submissions, is that both the First-tier Tribunal and the Upper Tribunal emphasise as part of their reasoning the purpose of the Fund’s investment activity. The First-tier Tribunal uses this phrase expressly in the passage from its decision quoted earlier and the Upper Tribunal refers to the investment activity being carried out not for its own sake but for the benefit of the University’s economic activity as a whole. This, we think, raises two questions about the correctness of the approach of both Tribunals to the attribution issue. The first, and most obvious, is that they may have adopted a purely purpose-based test which was rejected in BLP and later cases like Sveda. The second is that the decision in Kretztechnik, which was heavily relied on, was like BLP, Abbey National, Securenta and SKF concerned with activities designed to re-capitalise the companies in question: not to provide investment income. The costs of transactions (such as the issue or sale of shares in the taxpayer or its subsidiaries) which produce capital to re-finance the company’s business may for that reason be easier to analyse as linked to and part of the overheads of that business than when they are simply part of a continuing investment activity designed to produce an income. Transactions to raise capital are by their very nature unlikely to be carried out for their own sake. The Upper Tribunal rejected making any distinction between capital raising and income generating transactions for this purpose because in their view the sale of shares held as investment for a number of years can be regarded as capital transactions. Mr Beal says that this is misconceived. As in this case, the generation of investment income by a taxpayer who is not carrying on a business dealing in shares is treated as outside the scope of VAT because it is the equivalent of a private owner disposing of his own property which is not an economic activity. But it does not amount to re-capitalisation.

That, we think, is right but it still requires the Court to decide whether the use of the services of F&CM to manage the Fund and to produce the income should be treated as in Wellcome Trust as consumed by the non-taxable activity they are involved in or whether there is a sufficient link for Article 168 purposes with the economic activities that the income subsidises. Although the income from the Fund is used for the purposes of the whole range of the University’s activities, F&CM and the services they provide have no involvement in or connection with what the University does with the income and are not simply re-capitalising the University by the sale of its assets. In transactional terms it may therefore be more difficult to look beyond the share and other dealings themselves without invoking some resort to purpose in order to make an objective link between the fee expenditure and the overhead costs of the University’s economic activities. This, as we have explained, appears to be impermissible unless some overriding principle of fiscal neutrality is available to foreclose the argument. But if no distinction for the purposes is to be made between exempt and non-taxable transactions that principle is no longer applicable.

We recognise the force of Mr Hitchmough’s submissions that the trend in recent cases has been to find the necessary economic link between the initial expenditure and the economic activities which follow unless compelled by the particular circumstances of the case to conclude that the costs are linked to a more immediate exempt or non-taxable supply. He placed much emphasis on what was said by this Court in the Associated Newspaper case where the cost of supplying the vouchers was held to be linked economically to the taxpayer’s business of selling newspapers.

In that case it was, however, difficult to treat the purchase of an incentive to buy the newspapers as anything but part of the promotion of the taxpayer’s business. In this case we consider that the link in transactional terms is more remote and that the decisions in cases like Kretztechnik may have depended on the difference in tax treatment between exempt and non-taxable supplies which we referred to earlier.

We have therefore come to the conclusion that the correct approach to be taken to the issue of attribution in this case is not acte clair and we propose to refer the matter for guidance to the CJEU under Article 267 TFEU. In particular, we consider that there remains a lack of clarity as to whether in a case such as this where the management fees were incurred in relation (and only in relation) to a non-taxable investment activity it is nonetheless possible to make the necessary link between those costs and the economic activities which are subsidised with the investment income which is produced. As part of the same issue we would also seek confirmation that our reading of the decision is Sveda is correct and that no distinction is to be made between exempt and non-taxable transactions for the purpose of deciding whether input tax is deductible.

We will ask the parties by their counsel to assist the Court in settling the terms of the reference and the questions.