Indirect Tax Update for week ending 26 June 2015

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ITU
Summary
HMRC has issued a Revenue &
Customs Brief setting out its
views on its recent defeat at the
hands of the UK's Court of
Appeal. As expected, HMRC
does not agree with the Court of
Appeal and is seeking leave to
appeal to the UK's Supreme
Court.
The Upper Tribunal has also
dismissed HMRC's appeal in a
case relating to the University of
Cambridge and its substantial
endowment fund.
The University won its appeal at
the First-tier Tribunal and
HMRC appealed to the Upper
Tribunal which has confirmed
that costs incurred on the
management of the Universities
endowment fund are overheads
of the University. As such the
VAT incurred can be reclaimed
in accordance with the
Universities partial
exemption/non-business
method.
30 June 2015
Revenue & Customs Brief 09/2015
HM Revenue & Customs has issued a Revenue & Customs Brief which sets out its
response to the Court of Appeal's unanimous judgment in the Littlewoods compound
interest case. Readers will recall that in May 2015, the Court of Appeal confirmed that
under EU law, the taxpayer was entitled to additional interest in relation to the
statutory interest that had already been paid. The Court found that the payment of
simple interest under UK law did not provide Littlewoods with adequate indemnity for
the loss of the use of the money that it had paid in error.
Not surprisingly, (given the sums involved), HMRC has stated in its Brief that it does
not agree with the Court of Appeal's judgment and that it (the judgment) is at odds
with the requirements of European law and how Parliament intended VAT law to
work. Accordingly, HMRC is to seek leave to appeal the matter to the UK's Supreme
Court. Whether or not leave will be granted is likely to take a few months to decide. In
the meantime, HMRC's Brief states that its position in relation to the payment of
compound interest remains the same (ie that it is not payable). HMRC also state that,
as the Court of Appeal (like the High Court before it) ruled that, in many cases, the
statutory interest already paid would be adequate, for other claimants to succeed, the
details of their claim will have to be considered in similar detail in separate court
proceedings.
As far as 'live' claims for compound interest are concerned, HMRC is to apply for
these to be stayed pending the final determination of the Littlewoods litigation.
Appeals that have been made via the Tribunal will also continue to be stood over.
Comment – Given the Court of Appeal's unanimous judgment, it is not clear on what
point of law HMRC can seek leave to appeal to the Supreme Court. However, given
the vast sums of money involved both in this case (£1Bn) and in cases which are stood
over behind it (£inestimable), it seems inevitable that the matter will get a hearing in
the UK's highest court. In addition, given that the matter relates to EU law, a further
referral to the Court of Justice cannot be ruled out. The case has taken a decade to get
this far and it is conceivable that it could take many more years yet. As Albert Einstein
once said, "compound interest is the 8th wonder of the world – he who understands it
earns it, he who does not, pays it". The longer this goes on the more interest will be
payable if it goes the way of the taxpayer!
Issue19/2015
Compound Interest – HMRC's
response to Littlewoods
Indirect Tax Update

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GRT100456
Upper Tribunal
HMRC v University of Cambridge
HMRC has lost its appeal in this case which relates to the recovery of VAT input tax incurred by the
University on management fees in connection with its endowment fund. The University took its case
to the First-tier Tribunal which issued its decision in the taxpayer's favour. This was HMRC's appeal
against that decision.
The University argued that the investment returns of the endowment fund were used to further the
whole of the activities of the University and not just its VAT exempt educational or research
activities. As such, the University argued that the VAT incurred on the management fees payable to
its fund managers should be regarded as 'residual' input tax (ie VAT on overheads) such that the
input VAT could be reclaimed from HMRC in accordance with its special partial exemption / non-
business method. HMRC in effect argued that the costs incurred were wholly attributable to the sale
of investments and was not therefore reclaimable.
Like the First-tier Tribunal before it, the Upper Tribunal ruled in the University's favour. The
investments were made in order to benefit the whole of the University and the investment activity
was not an economic activity in its own right. As a result, the management fees were overheads and
the input VAT incurred on them was recoverable to the extent allowable under the Universities
special method.
Comment
HMRC may seek leave
to appeal this matter to
the Court of Appeal.
However, it is not clear
what grounds, if any,
exist for such an
appeal.
Attribution of input tax
is a vital component of
any partial exemption
methodology. For
taxpayers that are
'heavily' exempt, it is
important to ensure
that as much input tax
as is possible gets into
the 'residual' pot.
First-tier Tax Tribunal (FTT)
Comment
As this case
demonstrates, HMRC
will often argue that
there is no direct and
immediate link between
a cost and a taxpayer's
taxable activities.
Where a taxpayer
makes both taxable and
exempt supplies it is
important to ensure
that input VAT is
appropriately attributed
in order to maximise
input VAT recovery.
Taxpayers should not
simply accept HMRC's
assertions.
North of England Zoological Society
In a similar partial exemption case, the FTT has issued a judgment relating to the extent to which
VAT incurred by the zoo in respect of keeping and maintaining animals in the zoo and on the
building and improvement of new animal habitats at the zoo (animal related costs) can be reclaimed.
The Society argued that these animal related costs are a cost component of its taxable supplies
(including catering and retail supplies) and its exempt supplies of admission to the zoo. HMRC on
the other hand argued that the animal related costs were, simply, cost components of the exempt
admission supplies and, as a result, the VAT incurred could not, therefore, be reclaimed.
The point for the Tribunal to decide was, therefore, whether there was a sufficient link between the
animal related costs and supplies of catering, merchandise and books to justify an apportionment of
the input tax incurred. On the evidence, the Tribunal concluded that the animal related costs have a
direct and immediate link to the catering and retail supplies and that the animal related costs are a
cost component of those supplies. The Society exploits the animals in order to achieve various
income streams the most significant of which are admissions, catering and retail. In that sense,
therefore, the animal related costs are borne by all those supplies. The Tribunal allowed the taxpayer's
appeal. The VAT incurred on animal related costs could be reclaimed in accordance with the
Society's partial exemption method.
Contact
Stuart Brodie Scotland stuart.brodie@uk.gt.com (0)14 1223 0683
Karen Robb London & South East karen.robb@uk.gt.com (0)20 772 82556
Richard Gilroy London & South East richard.gilroy@uk.gt.com (0)20 7728 3170