England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL
(TAX AND CHANCERY CHAMBER)
Mr Justice Simon and Judge Greg Sinfield
[2015] UKUT 305 TCC

		Royal Courts of Justice Strand, London, WC2A 2LL
		27 March 2018

Lord Justice Patten :

1. This is the judgment of the Court.
2. 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.
3. 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).
4. 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.
5. 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.
6. 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.
7. 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.
8. 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-437/06 Securenta Göttinger Immobilienanlagen und Vermögensmanagement AG v Finanzamt Göttingen EU:C:2008:166, [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.
9. 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):

"78. The purpose of a particular activity, and in this case the Appellant's investment activity which was not by itself an economic activity, must be looked at objectively to determine whether the costs associated with that activity qualify as overheads. If the purpose of the activity is to benefit the other economic activities then the costs of the non-economic activity can be regarded as overhead costs so that the input tax is deductible wholly or in part, depending on whether outputs include exempt as well as taxable supplies. The professional management and other costs associated with the investment activity formed part of the component parts of the Appellant's supplies. Although there were separate activities, the investment activity was effected for the benefit of the Appellant's other activities. There cannot be any other conclusion if the investment activity was not something which was carried on for its own sake. The costs of the investment activity were incurred solely for the benefit of the Appellant's economic activity in general, and objectively were not incurred for the purpose and benefit of its non-economic investment activity.

79. In BLP the ultimate reason for the taxable supplies was the carrying out of a taxable transaction but this was only relevant because it related to an activity which the Appellant agreed was exempt. In that case the Appellant asked the court to "look through" an objective analysis of the cost of those taxable supplies to the ultimate intention of the tax-payer. Here they do not. We do not accept that it is necessary for the Appellant to demonstrate that the professional management fees burden only the cost of the economic activity. The investment activity was not an activity carried out for its own sake. Although the investment activity was a separate activity it was undertaken for the benefit of the Appellants other activities. Whether the investment activity operated as a subsidy or the costs thereof constituted an overhead is not in our view relevant.

80. We agree with the Appellant that Kretztechnik has a wider application than that asserted by the Respondents. There is clearly a link between the Appellant's investment activity and its overall economic activity. Costs associated with the investment activity were in reality components of the price of the Appellant's research and publications on the one hand and educational and other exempt activities on the other. The fact that the investment activity may have raised, primarily, income rather than capital is in our view of no relevance."

10. 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:

"69. In our view, the University falls squarely within paragraph 36 of the ECJ's judgment in Kretztechnik, as applied in SKF. The question to be asked in this case is whether the University's investment activity through the Fund was carried out for the benefit of the University's economic activity in general. If so, the costs of that activity form part of the University's overheads and are therefore, as such, component parts of the price of its products. The University incurred costs in relation to an activity, namely investment, which was outside the scope of VAT. Accordingly, there were no supplies of investments to which the input transactions could be attributed. The FTT found, in [78] and [79], that the investment activity was not an activity carried out for its own sake but for the benefit of the University's economic activity in general. It follows that the costs associated with that investment activity were part of the University's overheads and, as such, deductible in accordance with the CVCP Agreement."

The Statutory Context

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

"(a) The supply of goods for consideration within the territory of a member of state by a taxable person acting as such;

(b) The supply of services for consideration within the territory of a member of state by a taxable person acting as such."

12. "Taxable person" is defined in Article 9(1) as:

"any person who, independently, carries out in any place any economic activity, whatever the purpose of that activity."

13. 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:

"insofar as the goods or services are used for the purposes of the taxed transactions".

14. Article 173 provides (so far as material) that:

"..in the case of goods or services used by a taxable person both for transactions in respect of which VAT is deductible pursuant to Article 168…and for transactions in respect of which VAT is not deductible, only such proportion of the VAT as is attributable to the former transactions shall be deductible."

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

"4(1) VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.

(2) A taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply.

5(1) Schedule 4 shall apply for determining what is, or is to be treated as, a supply of goods or a supply of services.

(2) Subject to any provision made by that Schedule and to Treasury orders under subsections (3) to (6) below—

(a)      "supply" in this Act includes all forms of supply, but not anything done otherwise than for a consideration;

…..

24(1)     Subject to the following provisions of this section, "input tax", in relation to a taxable person, means the following tax, that is to say—

(a)     VAT on the supply to him of any goods or services;

…..

being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him.

(2)     Subject to the following provisions of this section, "output tax", in relation to a taxable person, means VAT on supplies which he makes…..

(5) Where goods or services supplied to a taxable person….. are used or to be used partly for the purposes of a business carried on or to be carried on by him and partly for other purposes VAT on supplies….. shall be apportioned so that only so much as is referable to his business purposes is counted as his input tax….."

16. 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:

"16. As the Court pointed out in its judgment of 5 May 1982 in Case 15/81 (Schul v Inspecteur der Invoerrechten en Accijnzen, [1982] ECR 1409), [1982] EUECJ R-15/81, a basic element of the VAT system is that VAT is chargeable on each transaction only after deduction of the amount of the VAT borne directly by the cost of the various components of the price of the goods and services and that the deduction procedure is so designed that only taxable persons may deduct the VAT already charged on the goods and services from the VAT for which they are liable.

…..

19. From the provisions set forth above it may be concluded that the deduction system is meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities. The common system of value-added tax therefore ensures that all economic activities, whatever their purpose or results, provided that they are themselves subject to VAT, are taxed in a wholly neutral way."

17. 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.
18. 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.
19. 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.
20. 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.

The cases

21. 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:

"19. Paragraph 5 lays down the rules applicable to the right to deduct VAT where the VAT relates to goods or services used by the taxable person 'both for transactions covered by paragraphs 2 and 3, in respect of which value added tax is deductible, and for transactions in respect of which value added tax is not deductible'. The use in that provision of the words 'for transactions' shows that to give the right to deduct under para 2, the goods or services in question must have a direct and immediate link with the taxable transactions, and that the ultimate aim pursued by the taxable person is irrelevant in this respect.

…..

25. It is true that an undertaking whose activity is subject to VAT is entitled to deduct the tax on the services supplied by accountants or legal advisers for the taxable person's taxable transactions and that if BLP had decided to take out a bank loan for the purpose of meeting the same requirements, it would have been entitled to deduct the VAT on the accountant's services required for that purpose. However, that is a consequence of the fact that those services, whose costs form part of the undertaking's overheads and hence of the cost components of the products, are used by the taxable person for taxable transactions.

26. In that respect it should be noted that a trader's choice between exempt transactions and taxable transactions may be based on a range of factors, including tax considerations relating to the VAT system. The principle of the neutrality of VAT, as defined in the case law of the court, does not have the scope attributed to it by BLP. That the common system of VAT ensures that all economic activities, whatever their purpose or results, are taxed in a wholly neutral way, presupposes that those activities are themselves subject to VAT (see in particular Rompelman v Minister van Financiën (Case 268/83) [1985] ECR 655 at 664, para 19)."

22. 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:

"30. A consideration of those provisions together shows that the Community legislature, proceeding from an ideal image of 'chains of transactions'—to adopt the neat phrase used at the hearing by the representative of the United Kingdom—intended to attach to each transaction only so much VAT liability as corresponds to the added value accruing in that transaction, so that there is to be deducted from the total amount the tax which has been occasioned by the preceding 'link in the chain' (see, for example, the judgment in EC Commission v France (Case 50/87) [1988] ECR 4797 at 4817, para 16)."

23. 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.
24. 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:

"29. It should be borne in mind that, according to the fundamental principle which underlies the VAT system, and which follows from art 2 of the First and Sixth Directives, VAT applies to each transaction by way of production or distribution after deduction of the VAT directly borne by the various cost components (see, to this effect, BP Supergas Anonimos Etairia Geniki Emporiki-Viomichaniki kai Antiprossopeion v Greece (Case C-62/93) [1995] STC 805 at 821, [1995] ECR I-1883 at 1913, para 16).

30. It follows from that principle as well as from the rule enshrined in the judgment of BLP Group plc v Customs and Excise Comrs (Case C-4/94) [1995] STC 424 at 437, [1995] ECR I-983 at 1009, para 19 according to which, in order to give rise to the right to deduct, the goods or services acquired must have a direct and immediate link with the taxable transactions, that the right to deduct the VAT charged on such goods or services presupposes that the expenditure incurred in obtaining them was part of the cost components of the taxable transactions. Such expenditure must therefore be part of the costs of the output transactions which utilise the goods and services acquired. That is why those cost components must generally have arisen before the taxable person carried out the taxable transactions to which they relate.

31. It follows that, contrary to what the Midland claims, there is in general no direct and immediate link in the sense intended in BLP Group, between an output transaction and services used by a taxable person as a consequence of and following completion of the said transaction. Although the expenditure incurred in order to obtain the aforementioned services is the consequence of the output transaction, the fact remains that it is not generally part of the cost components of the output transaction, which art 2 of the First Directive none the less requires. Such services do not therefore have any direct and immediate link with the output transaction. On the other hand, the costs of those services are part of the taxable person's general costs and are, as such, components of the price of an undertaking's products. Such services therefore do have a direct and immediate link with the taxable person's business as a whole, so that the right to deduct VAT falls within art 17(5) of the Sixth Directive and the VAT is, according to that provision, deductible only in part."

25. 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.
26. 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:

"35. The contrast between those two approaches may be more apparent than real. The reference to cost components in the BLP judgment is a reminder of the basic principle set out in Article 2 of the First Directive: 'On each transaction, value added tax ... shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components.' Thus, what matters is whether the taxed input is a cost component of a taxable output, not whether the most closely-linked transaction is itself taxable. As the Commission submitted at the hearing, the conclusion to be drawn from the BLP judgment is that the question to be asked is not what is the transaction with which the cost component has the most direct and immediate link but whether there is a sufficiently direct and immediate link with a taxable economic activity. Indeed, it may be stressed that in that case the Court was concerned with supplies which were not objectively linked to taxable transactions. Nevertheless, it remains clear from BLP that the 'chainbreaking' effect which is an inherent feature of an exempt transaction will always prevent VAT incurred on supplies used for such a transaction from being deductible from VAT to be paid on a subsequent output supply of which the exempt transaction forms a cost component. The need for a 'direct and immediate link' thus does not refer exclusively to the very next link in the chain but serves to exclude situations where the chain has been broken by an exempt supply.

37. Since the transfer is not a taxable supply, it follows inescapably from art 17(2) that it cannot itself form the basis for deduction of input tax incurred in connection with it.

38. However, it is not an exempt supply either. An exempt supply has the effect of breaking the VAT chain. There is no reason to consider that the chain is broken by a transaction in which 'no supply of goods [or services] has taken place'. On the contrary, the stipulation that 'the recipient shall be treated as the successor to the transferor' stresses the continuity of the situation from a VAT point of view. Although—to pursue the metaphor—one link in the chain is deemed not to exist, the fact of that 'missing link' does not imply a break and a recommencement of the chain but rather a sequential relationship between the links on either side of it. In addition, as I have reasoned, the treatment accorded to exemptions should be applied restrictively. Thus it is appropriate to look further in order to see whether the VAT which it is sought to deduct was borne by a supply forming a cost component of some other taxable transaction."

27. 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:

"35. However, the costs of those services form part of the taxable person's overheads, and as such are cost components of the products of a business. Even in the case of a transfer of a totality of assets, where the taxable person no longer effects transactions after using those services, their costs must be regarded as part of the economic activity of the business as a whole before the transfer. Any other interpretation of art 17 of the Sixth Directive would be contrary to the principle that the VAT system must be completely neutral as regards the tax burden on all the economic activities of a business provided that they are themselves subject to VAT, and would make the economic operator liable to pay VAT in the context of his economic activity without giving him the possibility of deducting it (see, to that effect, Gabalfrisa SL and ors v Agencia Estatal de Administración Tributaria (AEAT) (Joined Cases C-110/98 to C-147/98) [2000] ECR I-1577, para 45). An arbitrary distinction would thus be drawn between expenditure incurred for the purposes of a business before it is actually operated and that incurred during its operation, on the one hand, and, on the other hand, the expenditure incurred in order to terminate its operation.

36. Thus in principle the various services used by the transferor for the purposes of the transfer of a totality of assets or part thereof have a direct and immediate link with the whole economic activity of that taxable person.

37. It follows from art 17(5) of the Sixth Directive that a taxable person who effects both transactions in respect of which VAT is deductible and transactions in respect of which it is not may deduct only that proportion of the VAT which is attributable to the former transactions.

38. However, as the court held in the para 26 of the Midland Bank judgment ([2000] STC 501 at 519), a taxable person who effects transactions in respect of which VAT is deductible and transactions in respect of which it is not may nevertheless deduct the VAT charged on the goods or services acquired by him, where those goods or services have a direct and immediate link with the output transactions in respect of which VAT is deductible, without it being necessary to differentiate according to whether art 17(2), (3) or (5) of the Sixth Directive applies.

39. That rule must apply also to the costs of the goods and services which form part of the overheads relating to a part of a taxable person's economic activities which is clearly defined and in which all the transactions are subject to VAT, since those goods and services thus have a direct and immediate link with that part of his economic activities."

28. 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.
29. 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:

"74. Thus, if the transaction with which the input is most closely linked is one which falls entirely outside the scope of VAT because it is in any event not a supply of goods or services, it is irrelevant for the purpose of determining deductibility. What matters is the link, if any, with such output supplies, and whether they are taxed or exempt.

75. The question to be asked in Kretztechnik's case is therefore whether the capital raised by the share issue was used for the purposes of one or more taxed output transactions.

76. It seems likely that the use of the capital — and the services connected with the raising of that capital — cannot be linked to any specific output transactions, but must rather be attributed to the company's economic activity as a whole. There can be no reasonable doubt that a commercial company which raises capital does so for the purposes of its economic activity."

30. The Court took a similar view:

"34. The deduction system is meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities. The common system of VAT consequently ensures complete neutrality of taxation of all economic activities, whatever their purpose or results, provided that they are themselves subject in principle to VAT (see, to that effect, Case 268/83 Rompelman [1985] ECR 655, paragraph 19; Case C-37/95 Ghent Coal Terminal [1998] ECR I-1, paragraph 15; Gabalfrisa and Others, paragraph 44; Midland Bank, paragraph 19, and Abbey National, paragraph 24).

35. It is clear from the last-mentioned condition that, for VAT to be deductible, the input transactions must have a direct and immediate link with the output transactions giving rise to a right of deduction. Thus, the right to deduct VAT charged on the acquisition of input goods or services presupposes that the expenditure incurred in acquiring them was a component of the cost of the output transactions that gave rise to the right to deduct (see Midland Bank, paragraph 30, and Abbey National, paragraph 28, and also Case C-16/00 Cibo Participations [2001] ECR I-6663, paragraph 31).

36. In this case, in view of the fact that, first, a share issue is an operation not falling within the scope of the Sixth Directive and, second, that operation was carried out by Kretztechnik in order to increase its capital for the benefit of its economic activity in general, it must be considered that the costs of the supplies acquired by that company in connection with the operation concerned form part of its overheads and are therefore, as such, component parts of the price of its products. Those supplies have a direct and immediate link with the whole economic activity of the taxable person (see BLP Group, paragraph 25; Midland Bank, paragraph 31; Abbey National, paragraphs 35 and 36, and Cibo Participations, paragraph 33)."

31. 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.
32. 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:

"32. No document in the case would support an assertion that, had it not carried out economic activities which were subject to VAT as from 1 January 1993, Investrand would not have obtained the advisory services at issue in the main proceedings. It thus appears that, whether or not it carried out such activities as from that date, Investrand would have obtained those services with a view to safeguarding the financial consideration for the sale of shares to Hi-Tec Sports which took place in 1989.

33. In those circumstances, it cannot be considered that the costs relating to those services were incurred for the purposes of and with a view to Investrands taxable activities. As the exclusive reason for those costs is not to be found in those activities, the costs have no direct and immediate link to them.

…..

35. It should also be noted that this case can be distinguished from that which gave rise to the judgment in Kretztechnik. The costs incurred for advice in the case which gave rise to that judgment, which were accepted by the Court, in paragraph 36 thereof, as constituting overheads which had a direct and immediate link with the taxable person s economic activity as a whole, related to a share issue intended to increase the taxable person s capital for the benefit of its economic activity."

33. 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.
34. 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.
35. 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:

"76.       It appears to me that the Court [in Kretztechnik] has accepted the distinction made by Advocate General Jacobs in his Opinion referred to above between, on the one hand, output transactions exempted from payment of VAT, and, on the other hand, those which entirely escape any VAT liability, because the latter cannot be deemed to be either supplies of goods or supplies of services, and has accordingly also confirmed the decision made in BLP Group, on which, moreover, the Advocate General's argument was based.

77.      The approach outlined above, which seems to me to be that adopted in the case-law, may appear to treat share disposal transactions which fall outside the scope of VAT more favourably than those which, although within its scope, are exempted from VAT under the provisions of the Sixth Directive (and/or those of Directive 2006/112). Whereas the right to deduct may arise on services acquired to carry out a transaction outside the scope of VAT when such services are regarded as directly and immediately linked to the general economic activity of the taxable person, the VAT payable on services acquired to carry out an exempt transaction, on the other hand, cannot be deducted.

78.      However, that situation is no more than the consequence inherent in the common system established by the Sixth Directive (confirmed by Directive 2006/112) and in the dividing line which must be drawn as clearly as possible between taxable transactions, on the one hand, and exempt transactions, on the other; hence the direct and immediate link test and the breaking of the VAT chain when an input transaction on which VAT is payable is directly and immediately related to an output transaction which is exempted from VAT.

79.      Moreover, since the VAT chain is not broken when the share disposal transaction is one which falls entirely outside the scope of VAT, there is equally, to my mind, no difference in treatment which adversely discriminates against the taxable person who acquires supplies of services in order to carry out disposal transactions which are covered by the exemption from VAT provided for in Article 13B(d)(5) of the Sixth Directive and who, consequently, does not have the right to deduct the input VAT, even in respect of general overheads which that taxable person has incurred."

36. 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:

"64. In order to give a useful answer to the referring court, it must be recalled that the court has held, on numerous occasions, that there is a right to deduct VAT paid on consultancy services used for the purposes of various financial transactions, on the ground that those services were directly attributable to the economic activities of the taxable persons (see, inter alia, Midland Bank (para 31); Abbey National (paras 35 and 36); Cibo Participations (paras 33 and 35); Kretztechnik (para 36); and Securenta (paras 29 and 31)).

65. Admittedly, the output transactions in shares in the cases which led to the above-mentioned judgments, unlike those in the main proceedings in the present case, were outside the scope of VAT. However, as is clear from the case law cited in paras 28 and 30 of this judgment, the main factor distinguishing the legal classification of those transactions from that of transactions which come within the scope of VAT but are exempt from it is whether the company which is liable to the tax is or is not involved in the management of the companies in which a shareholding has been taken.

66. However, if the right to deduct input VAT paid on consultancy costs relating to a disposal of shares which is exempted because of involvement in the management of the company whose shares are sold was not allowed, and if the right to deduct input VAT in respect of such costs relating to a disposal which is outside the scope of VAT was allowed on the ground that those costs constitute general costs of the taxable person, that would amount to treating objectively similar transactions differently for tax purposes, and would be an infringement of the principle of fiscal neutrality.

67. In that regard, the court has ruled that the principle of fiscal neutrality, which is a fundamental principle of the common system of VAT, precludes treating similar supplies of services, which are thus in competition with each other, differently for VAT purposes (see, inter alia, Kingscrest Associates Ltd v Customs and Excise Comrs (Case C-498/03) [2005] STC 1547, [2005] ECR I-4427, para 41; Turn- und Sportunion Waldburg v Finanzlandesdirektion für Oberösterreich (Case C-246/04) [2006] STC 1506, [2006] ECR I-589, para 33; and R (on the application of Teleos plc) v Revenue and Customs Comrs (Case C-409/04) [2008] STC 706, [2008] QB 600, para 59) and, further, precludes economic operators who carry out the same activities from being treated differently as far as the levying of VAT is concerned (see, inter alia, Gregg v Customs and Excise Comrs (Case C-216/97) [1999] STC 934, [1999] ECR I-4947, para 20, and Revenue and Customs Comrs v Isle of Wight Council (Case C-288/07) [2008] STC 2964, [2008] ECR I-7203, para 42).

68. It follows that, if the consultancy costs relating to disposals of shareholdings are considered to form part of the taxable person's general costs in cases where the disposal itself is outside the scope of VAT, the same tax treatment must be allowed if the disposal is classified as an exempted transaction."

37. 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.
38. The CJEU returned to some of these issues in Case C-126/14, EU:C:2015:712 'Sveda' UAB v Valstybine mokesciu 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.
39. 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:

"33.      However, the Court has further developed its case-law since that case. It still remains the case that for Article 168 of the VAT Directive to apply a direct and immediate link must have been found between a given input transaction under examination and a particular output transaction or transactions giving rise to the right of deduction. Such a link may nevertheless also exist with the economic activity of the taxable person as a whole if the costs of the input transactions form part of the general costs of the taxable person and are therefore cost components of all goods or services delivered or provided by him.

34.      According to recent case-law, the decisive factor for a direct and immediate link is consistently that the cost of the input transactions be incorporated in the cost of individual output transactions or of all goods and services supplied by the taxable person.  This applies irrespective of whether the use of goods or services by the taxable person is at issue.

35.      Consequently, there is a right of deduction in the present case if the cost of acquiring or manufacturing the capital goods of the recreational path is incorporated, in accordance with case-law, in the cost of the output transactions, taxed under the VAT Directive."

40. 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:

"45.      The existence of an objective economic link between input and output transactions is therefore crucial to the question whether the costs are incorporated into the price of a service as understood in case-law.  A merely causal link is clearly not sufficient.  However, if an input transaction objectively serves the purpose of the performance of certain or all output transactions of a taxable person, there is a direct and immediate link between the two as understood in case-law. This is because in such a case the input transaction constitutes, from an economic perspective, a cost component in the provision of the respective output transaction. As the wording of Article 168 of the VAT Directive already indicates, that therefore depends on the objective purpose of the use of an input transaction.

46.      In the present case the national court found that the creation of the recreational path serves to attract visitors who may then be supplied with goods and services for consideration. Consequently, the creation of the recreational path belongs, from an economic perspective, to the cost components of these transactions."

41. 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:

"29.      It is apparent from the case-law of the Court that, in the context of the direct-link test that is to be applied by the tax authorities and national courts, they should consider all the circumstances surrounding the transactions concerned and take account only of the transactions which are objectively linked to the taxable person's taxable activity. The existence of such a link must thus be assessed in the light of the objective content of the transaction in question (see, to that effect, judgment in Becker, C-104/12, EU:C:2013:99, paragraphs 22, 23 and 33 and the case-law cited).

30.      The findings of the referring court establish that, in the case in the main proceedings, the expenditure incurred by Sveda as part of the construction work on the recreational path should come partly within the price of the goods or services provided in the context of its planned economic activity.

31.      The referring court nevertheless harbours doubts as to whether there is a direct and immediate link between the input transactions and Sveda's planned economic activity as a whole, owing to the fact that the capital goods concerned are directly intended for use by the public free of charge.

32.      In that regard, the case-law of the Court makes it clear that, where goods or services acquired by a taxable person are used for purposes of transactions that are exempt or do not fall within the scope of VAT, no output tax can be collected or input tax deducted (judgment in Eon Aset Menidjmunt, C-118/11, EU:C:2012:97, paragraph 44 and the case-law cited). In both cases, the direct and immediate link between the input expenditure incurred and the economic activities subsequently carried out by the taxable person is severed.

33.      First, in no way does it follow from the order for reference that the making available of the recreational path to the public is covered by any exemption under the VAT Directive. Second, given that the expenditure incurred by Sveda in creating that path can be linked, as is apparent from paragraph 23 of this judgment, to the economic activity planned by the taxable person, that expenditure does not relate to activities that are outside the scope of VAT.

34.      Therefore, immediate use of capital goods free of charge does not, in circumstances such as those in the main proceedings, affect the existence of the direct and immediate link between input and output transactions or with the taxable person's economic activities as a whole and, consequently, that use has no effect on whether a right to deduct VAT exists.

35.      Thus, there does appear to be a direct and immediate link between the expenditure incurred by Sveda and its planned economic activity as a whole, which is, however, a matter for the referring court to determine."

42. 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.
43. To complete the review of the CJEU authorities, we come to Case 132/16 Iberdrola Inmobiliaria Real Estate Investments EOOD EU:C:2017:683, [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.
44. 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:

"31.      It is apparent from the case-law of the Court that, in the context of the direct-link test that is to be applied by the tax authorities and national courts, they should consider all the circumstances surrounding the transactions concerned and take account only of the transactions which are objectively linked to the taxable person's taxable activity. The existence of such a link must thus be assessed in the light of the objective content of the transaction in question (see, to that effect, judgment of 22 October 2015, Sveda, C-126/14, EU:C:2015:712, paragraph 29).

32.      In the appraisal of the question as to whether, in circumstances such as those at issue in the main proceedings, Iberdrola has the right to deduct input VAT for the reconstruction of the waste-water pump station, it is therefore necessary to determine whether there is a direct and immediate link between, on the one hand, that reconstruction service and, on the other hand, a taxed output transaction by Iberdrola or that undertaking's economic activity.

33.      It is clear from the order for reference that, without the reconstruction of that pump station, it would have been impossible to connect the buildings which Iberdrola planned to build to that pump station, with the result that that reconstruction was essential for completing that project and that, consequently, in the absence of such reconstruction, Iberdrola would not have been able to carry out its economic activity.

34.      Those circumstances are likely to demonstrate the existence of a direct and immediate link between the reconstruction service in respect of the pump station belonging to the municipality of Tsarevo and a taxed output transaction by Iberdrola, since it appears that the service was supplied in order to allow the latter to carry out the construction project at issue in the main proceedings.

35.      The fact that the municipality of Tsarevo also benefits from that service cannot justify the right to deduct corresponding to that service being denied to Iberdrola if the existence of such a direct and immediate link is established, which is a matter for the referring court to determine."

45. 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.

The present appeal

46. 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.
47. 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.
48. 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.
49. 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.
50. 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.
51. 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.
52. 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.
53. 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.
54. We will ask the parties by their counsel to assist the Court in settling the terms of the reference and the questions.
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