PE21500 - Partial Exemption principles: attribution case law
BLP - [1995] STC 424, C-4/94
This case was about a normally taxable holding company that sold off one of its subsidiaries by selling its shares. The reason they did this was that the group as a whole was in financial difficulty and needed funds so that they could continue to trade. The ultimate purpose of the sale, therefore, was so that the group could continue to trade and in particular so that BLP could continue to charge taxable management charges to its other subsidiaries. BLP sought to link the costs of the share sale to this ultimate purpose and thus deduct them as directly attributable to those taxable management charges.
This case brought out several important concepts. Firstly it highlighted the need for a direct and immediate link between an input supply and taxable outputs for there to be any entitlement to deduct. It highlighted the idea of a “chain breaking” exempt supply that stops VAT flowing through the chain of one business’s output tax being another business’s input tax until the final consumer is reached. And it confirmed that, as VAT is a transaction-based tax, the ultimate purpose of a business is irrelevant and it is only the immediate supply to which any input is a cost component that matters.
Midland Bank - [2000] STC 501, C-98/98
This case concerned the status of input tax incurred in consequence of a supply carrying the right to deduct associated input tax rather than as a cost component of that supply. Legal costs were incurred when the business was sued for alleged poor advice.
Although the issues of the case were quite narrow the judgement gave good guidance about attribution generally. It emphasised the need for a direct and immediate link whilst confirming that whether one exists or not is a question of fact for individual national courts to establish in particular circumstances. It confirmed that the general overheads of any business have a direct and immediate link to all the supplies of that business. It confirmed that there will generally be a temporal link between inputs and outputs, with the input coming before the output. Lastly it ruled that costs incurred as a consequence of any supply do not have a direct and immediate link to that supply and will thus be general overheads (how they will then be treated will depend on the PE method in operation by the business in question).
Southern Primary Housing Association Ltd - CA 2003, [2004] STC 209, [2003] EWCA Civ 1662
In this case a builder sold exempt land to a housing association and then immediately contracted to construct houses on it. They argued that the purchase of the land had a direct and immediate link with the construction services, as well as the sale of the land, and was thus non-attributable.
This case gives good further guidance on the meaning of “direct and immediate link”. That supply B could not happen but for the previous making of supply A does not make the cost components of supply A also partly cost components of supply B. There is a link between the cost components of supply A and the making of supply B but it is not a direct and immediate link. So in this case the purchase of the land had a direct and immediate link only with the sale of the land and not with the subsequent construction services.
Ghent Coal Terminal - [1998] STC 260, C-37/95
This is a Belgian case that addressed what happens when a business’s intentions are frustrated and costs incurred are wasted. The business incurred costs in creating a coal terminal linked to taxable supplies of coal but, before it could be used, it was compulsorily purchased and the costs were wasted.
This case confirms that any right to deduct arises when costs are incurred and by the intention at that time of how they will be used in the business. Thus the costs of building the coal terminal were taxable costs and fully deductible. It goes on to confirm that, except for when the rules for change of use come in at a later date, further developments after the year in which costs are incurred are irrelevant. So the fact that factors beyond the control of the business cause costs to be wasted does not mean that input tax has to be retrospectively re-attributed.
Curtis Henderson - [1992] STC 732
This case had serious implications for change of intention cases but we will only cover its implications in terms of initial attribution here. The business made exempt use of newly constructed buildings whilst retaining throughout the intention to finally make a taxable sale.
This case confirms that a business’s full intention of how a cost will be used in making supplies has to be taken into account when attributing input tax. If a cost will only be used for taxable or exempt purposes in the year it is incurred, but will be used for both taxable and exempt purposes in the business in due course, then it will be non-attributable from the outset.
Dial-a-phone - [2004] STC 987
This case concerned a company that made taxable supplies in the mobile telephones industry. It received commission from the airtime service providers (ASPs) to whom it introduced customers. In addition it received commission from the insurers in respect of policies taken out by customers, which was accepted as exempt from VAT. It reclaimed input tax on advertising services received. The Commissioners ruled that the tax was partly attributable to its exempt supplies of insurance services. DaP appealed, contending that the tax should be treated as wholly attributable to the taxable supplies, which it made to the ASPs. The tribunal rejected this contention and dismissed the appeal, holding that “the input tax on costs of advertising taxable phones with exempt insurance is directly and immediately linked to both the exempt and taxable supplies”. The Ch D and CA unanimously upheld this decision. Parker LJ held that the tribunal’s findings were “irresistible” and that there was “no basis for challenging those findings on appeal”.
Mayflower Theatre - [2007] STC 880
This case concerned a theatre and the costs involved with performances by production companies.
The case was useful in confirming there are two types of non attributable input tax. There is input tax on goods and services which have a direct and immediate link to specific taxable and exempt supplies. There is also a further category of input tax which does not have a direct and immediate link to any particular output supplies. These costs are ‘overheads’ costs not immediately linked with any particular outputs rather they are considered to have a direct and immediate link with all of the business’s income streams.
N Brown Group PLC and JD Williams & Company Ltd- [2019] TC07022
This case concerned input VAT incurred on marketing costs by a fashion retailer who supplied its clothes over the internet or mail order and offered credit facilities to its customers. The business claimed that costs incurred in relation to marketing had a direct and immediate link to only their taxable supplies and therefore sought to recover the associated input tax in full.
The First Tier Tribunal (FTT) found that there was a direct and immediate link between marketing costs and both taxable supplies of clothing and exempt supplies of credit facilities; and therefore, the advertising costs were residual, even if adverts did not mention the credit facility directly. The Court concluded that the costs were residual because of the business’ reliance on the supply of credit to enhance the sale of the taxable clothing.
University of Cambridge- (2019) BVC 32
The University of Cambridge had a substantial portfolio of investments and incurred VAT on the services of investment fund managers. The University submitted claims to recover this VAT even though the activity of the fund was not a business activity, and therefore was outside the scope of VAT. They claimed entitlement to recover the VAT on the services of the fund managers because the proceeds of the investments would be used to support its general business activity.
While both the FTT and Upper Tribunal found that the cost of managing the endowment funds were part of the University’s overheads and therefore deductible, the CJEU ruled that the University of Cambridge could not deduct the input tax it incurred on such costs, because those costs were not cost components of a specific supply, and they were also not cost components of the University’s overheads, because the proceeds of the investment only enabled those supplies to be provided at a reduced price.
Royal Opera House- [2021] BVC 12
The Royal Opera House (ROH) puts on opera and ballet performances and admission to these shows is an exempt supply. ROH also engages in other taxable activities including catering. It sought to reclaim input tax associated with production costs on the grounds that those costs have a direct and immediate link to their separate supplies of catering. HMRC maintained that such a link did not exist. However, the FTT found that the production costs had a direct and immediate link to the catering and other taxable supplies.
HMRC appealed to the UT, which overruled the FTT, finding no direct and immediate link between production costs and catering supplies. The Court of Appeal upheld the UT’s decision. It found that the link between the two was only indirect, and that the production costs had been used by ROH in putting on the productions, admission to which was an exempt supply.
This case highlighted the fact that the concept of a direct and immediate link goes beyond a ‘but for’ link as demonstrated in this case, where catering would not have been supplied if there were no performance for which tickets were sold.