PwC views on the recent University of Cambridge and Wellcome Trust VAT decisions

PwC's Carolyn Norfolk, VAT Director, has prepared this article regarding the recent University of Cambridge and Wellcome Trust VAT decisions for BUFDG members. The University of Cambrisge decision was from the Court of Justice of the European Union, whereas the Wellcome Trust decision was only from the First-tier Tax Tribinal and is being taken further.

Introduction 

If there is any quip that is certain to get a VAT practitioners eyes rolling it is usually the one about VAT being a simple tax - ‘it’s just 20% right?’ But for those working in the charitable sector, case law developments over the past few years mean that the situation is far from simple.  Determining whether VAT is due on a transaction in the first place, let alone whether VAT incurred on costs associated with particular activities can be recovered can feel, at times, like trying to navigate a route out of a legislative maze. 

On first reading, the recent CJEU decision in The Commissioners for Her Majesty’s Revenue and Customs v The Chancellor, Masters and Scholars of the University of Cambridge (‘Cambridge’), seems to be a disappointing result for the sector, with the prospect of input VAT recovery on investment management costs on endowment funds being held to be irrecoverable.  But is this really the case for everyone in the sector?

As those reading this article know, VAT is a transactional tax.  The circumstances surrounding a supply are critical to determining its VAT treatment. So, let's take a closer look at why Cambridge lost and what this might mean for those taxpayers who undertake non-economic activities?  

It seems to PwC that the CJEU identified three critical factual circumstances in Cambridge.   

1) The importance of the nature of the Fund's assets

As the CJEU succinctly stated, although the Principal VAT Directive (PVD) gives a very wide scope to VAT, only activities of an economic nature are covered by the tax.  It seems a matter of common ground that the source of Cambridge’s endowment funds was non-economic in nature. That is to say, the source of the underlying sums under investment came into the University’s by way of donation and that Donors gifted money or assets to the fund for subjective reasons, with nothing being supplied in return. 

2) The nature of the investment management activity

Having established that the source of Cambridge’s funds was non-economic in nature, the CJEU went on to find that the costs associated with the management of the fund must be treated in the same way for VAT purposes; as they were merely a direct continuation of an underlying non-economic activity.  Without a direct and immediate link to an economic activity, input VAT recovery on associated costs was simply not possible. 

3) Costs associated with reducing the price of an economic activity cannot be seen as a cost component of that activity

In reaching its judgement in Cambridge, the CJEU placed emphasis on the fact that the costs relating to the management of the fund were not incorporated into the price of any particular good or service. As a consequence, they could not be seen as a cost component of a particular transaction, nor could they be considered to be an overhead of the organisation's wider economic activity, as, under the analysis of the Court, the investment activity reduced the cost of the provision of goods and services rather than increasing its cost.   

Is this the end of the line for those with claims stood over behind Cambridge?

Whilst it is clear that the CJEU decision is a blow to taxpayers who have claims stood over behind Cambridge, it may not be a fatal one, or at least, there may still be a final chapter to consider.  

It must not be overlooked that in this case, there seemed to be agreement between the parties that the investment activity was non-economic in nature.  This may not be the case for all organisations. As a first step, any organisation with a Cambridge claim needs to consider the origin of the funds under management and the manner in which they are invested.  Were the funds under investment gifted to you, or are they the product of an economic activity? Perhaps they are a combination of the two? Simply because your organisation is a University, it does not necessarily follow that the nature of your fund will be the same as was found to be the case for Cambridge’s fund.

If your fund has characteristics of an economic activity, arguably the decision in Cambridge may not apply to you.     

We conclude therefore that there are some very important facts which underpin the decision in Cambridge. Such facts may apply to your fund at some moments in time and not others and they may not always apply where the activities of the fund have grown and developed through time.

Finally, even if you conclude that your fund is on all fours with the kind of facts found in Cambridge by the CJEU, a finding that the fund is not engaged in an economic activity may open up another opportunity.

The Wellcome Trust recently ran a successful First-tier Tribunal case where it was held that, since its investment activities were non-economic, it is not a "taxable person acting as such" for the purposes of Article 44 and that therefore no UK VAT was due under the reverse charge mechanism.  It appears to us that the CJEU decision in Cambridge is supportive of the analysis adopted by the First-tier Tribunal in this case. Now, whilst the arguments being advanced as this case progresses are again, very fact specific, it may be worth exploring these facts for your own funds, since some (or indeed all) of the "cost" of losing any Cambridge claims may be offset by reducing the VAT burden on investment management and potentially, other costs incurred on wider non-economic activities from non-EU suppliers.

Next steps

1. It would seem prudent, before withdrawing any claims made under Cambridge principles, to make sure that the specific facts set out in that case truly apply to you. The boundaries in this area are very finely drawn and, to be consistent with its policy in other areas, HMRC will have to weigh up the pros and cons of supporting, or otherwise, any particular arguments or positions. If you are not aligned with Cambridge's facts, what economic activity could you align with and what is the current VAT treatment of such activities. This enquiry may lead you into areas which are not currently considered in the sector.

2. If you believe that your fund is "like" Wellcome (and that really does need a proper enquiry), and you have significant non-EU VAT costs associated with the fund; before withdrawing any Input Tax claim based upon Cambridge, you should think very carefully to ensure that your position is fully protected, pending the resolution of the Wellcome case, as HMRC are unlikely to accept that claims can automatically moved behind Wellcome.

3. Given that these two cases are the latest in a succession of cases examining the nature of what constitutes economic activity it would seem an opportune moment to critically evaluate the wider activities undertaken by your organisation. How comfortable are you with the characterisation of activities as economic or non-economic. In light of the developing jurisprudence, how comfortable are you that the UK VAT you are accounting for under the reverse charge is properly due. Are the working assumptions made following the introduction of the PVD still valid in today's world?

So, in conclusion, facts, facts, facts - they are critically important in understand whether you are incurring UK VAT that should not be due. The interplay of the PVD, implementing regulations and case law mean that careful consideration is needed in order best protect your organisation's position.

PwC LLP.

August 2019.

PwC are the lead advisor in the Wellcome Trust litigation. For further information on how this case may affect you please contact Carolyn Norfolk (VAT Director) at Carolyn.a.norfolk@pwc.com or 07738 845343 or Jonathan Evans (VAT Partner) at jonathan.d.evans@pwc.com or 07725 827600.