© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
E3. Preparatory activities
Pre-trading activities treated as economic activity
- Acquisition of business assets to prepare for business making acquirer a taxable person
"[26] According to the settled case‑law of the Court, the economic activity referred to in Article 9(1) of Directive 2006/112 may consist in several consecutive transactions and, among those, preparatory acts, such as the acquisition of business assets and therefore the purchase of immovable property, must be regarded as constituting economic activity (see Rompelman, paragraph 22; Lennartz, paragraph 13; Case C‑110/94 INZO [1996] ECR I‑857, paragraph 15; and Fini H, paragraphs 21 and 22). Any person performing such preparatory acts is consequently regarded as a taxable person within the meaning of that provision and is entitled to deduct the VAT (Fini H, paragraph 22)." (SC Gran Via Moineşti C-257/11)
- Investment activity with intention of commencement treated as economic activity
"[27] Furthermore, a person who incurs investment expenditure with the intention, confirmed by objective evidence, of engaging in economic activity within the meaning of Article 9(1) of Directive 2006/112 must be regarded as a taxable person. Acting in that capacity, he has therefore, in accordance with Article 167 et seq. of the directive, the right immediately to deduct the VAT payable or paid on the investment expenditure incurred for the purposes of the transactions which he intends to carry out and which give rise to the right to deduct (see, to that effect, Rompelman, paragraphs 23 and 24; INZO, paragraphs 16 and 17; Ghent Coal Terminal, paragraph 17; Gabalfrisa and Others, paragraph 47; and Case C‑400/98 Breitsohl [2000] ECR I‑4321, paragraph 34)." (SC Gran Via Moineşti C-257/11)
"[45] ... the principle that VAT should be neutral as regards the tax burden on a business requires that the first investment expenditure incurred for the purposes of and with the view to commencing a business must be regarded as an economic activity and it would be contrary to that principle if such an activity did not commence until the business was actually exploited, that is to say until it began to yield taxable income. Any other interpretation of Article 4 of the directive would burden the trader with the cost of VAT in the course of his economic activity without allowing him to deduct it in accordance with Article 17, and would create an arbitrary distinction between investment expenditure incurred before actual exploitation of a business and expenditure incurred during exploitation.
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[47] It follows that a person who has the intention, confirmed by objective evidence, to commence independently an economic activity within the meaning of Article 4 of the Sixth Directive and who incurs the first investment expenditure for those purposes must be regarded as a taxable person..." (Gabalfrisa C-110/98)
See further: M5. Preparatory input VAT.
- Includes raising funds for potential future projects
"[67]...On the FTT’s findings of fact, the purchase of the SFPE units was part of an exercise raising funds for FASL’s economic activities. The underlying principle is the principle of neutrality which relieves the taxable person of the burden of VAT payable and paid in the course of all its economic activities: Rompelman, para 19; Belgian State v Ghent Coal Terminal NV, para 15; Gabalfrisa SL v Agencia Estatal de Administración Tributaria (Cases C-110/98 to C-147/98) EU:C:2000:145; [2000] ECR I-1577; [2002] STC 535, para 44.
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[70] The recognition that fund-raising costs may, where the evidence permits, be treated as general overheads of a taxable person’s business means that the taxable person must be able to provide objective evidence to support the connection between the fund-raising transaction and its proposed economic activities. The taxpayer also needs to maintain adequate banking arrangements and records to vouch the later use of the funds so raised to demonstrate its entitlement to deduct and to retain the deduction, if investigated." (HMRC v. Frank A Smart [2019] UKSC 39)
- Objective evidence of intention to commence economic activities may be required
"[46] Article 4 of the Sixth Directive does not, however, preclude the tax authority from requiring objective evidence in support of the declared intention to commence economic activities which will give rise to taxable transactions. In that context, it is important to state that a taxable person acquires that status definitively only if he made the declaration of intention to begin the envisaged economic activities in good faith. " (Gabalfrisa C-110/98)
Timing of commencement of output supplies
- Need not be clear when any project will commence
"[106]...This concerned the potential time lag between the incurring of the input and the carrying on of the economic activity to which FASL said it was linked. As I have explained in para 96 above, if a taxable person is not carrying on economic activity at the time it incurs the inputs (as happened in Sveda) then the input can still be linked to the future economic activity and hence can still be deductible if the court determines on the basis of objective evidence that it is the taxable person's intention to use the input in future for carrying on taxable economic activity. The authorities that Lord Hodge cites in para 60 and in support of his proposition (vii) relate to that point. In proposition (vii) he cites Sveda where that timing point was in issue and the two cases that the CJEU cited in Sveda. Those are cases in which the CJEU made clear that even if the goods acquired are not used immediately for economic activity, the right to deduct arises even if their use in an economic activity may occur sometime later: see the passages from Sveda cited at paras 51 and 53 of Lord Hodge's judgment." (Hotel La Tour v. HMRC [2025] UKSC 46)
"[68] While it is not clear from the FTT’s findings when any of FASL’s projects will come to fruition, I am persuaded that the FTT was entitled to conclude that FASL when it incurred the costs of the purchase of the SFPE units was acting as a taxable person because it was acquiring assets in support of its current and planned economic activities, namely farming and the windfarm. On that basis FASL was entitled to an immediate right of deduction of the VAT paid on the purchase of the SFPE units and is entitled to retain that deduction or repayment so long as it uses the SFPs which it received as cost components of its economic activities. A start-up business can acquire goods and services to support its future taxable supplies and claim VAT paid on those acquisitions as input tax; so too in principle can an existing business which proposes to expand its economic activity. On the facts found, FASL does not carry out and does not propose to carry out downstream non-economic activities or exempt transactions. Therefore, no question of apportionment under article 173 of the PVD arises." (HMRC v. Frank A Smart [2019] UKSC 39)
- Not permissible to require commencement within 1 year or defer input tax deduction
"[53] The fact remains that the national legislation at issue in the main proceedings not only makes the exercise of the right to deduct VAT paid by a taxable person liable thereto before he starts regularly carrying out taxable transactions conditional upon the submission of an express request and compliance with a time-limit of one year between such a request and the actual commencement of taxable transactions, but also penalises infringement of those requirements by systematic deferment of the exercise of the right to deduct until the time at which taxable transactions actually begin to be carried out on a regular basis. Such legislation may even lead to the forfeiture of that right if those transactions do not commence or if the right to deduct is not exercised within five years from the time at which that right arises.
[54] In those circumstances, such legislation goes beyond what is necessary to attain the objectives of ensuring the correct levying and collection of the tax and preventing fraud." (Gabalfrisa C-110/98)
Preparatory acts by a different person
- Provision of client base for use by partnership free of charge not economic activity
"[35] It is clear that, in the case which gave rise to Polski Trawertyn, the output transaction which the two future partners effected, namely the contribution of immovable property to the partnership in the form of investment expenditure for the purposes of the economic activity of that partnership, certainly fell within the scope of VAT, but constituted a transaction exempt from that tax. On the other hand, in the case in the main proceedings, the output transaction does not fall within the scope of VAT, since the provision of the client base for use by the new partnership free of charge cannot be considered to constitute an ‘economic activity’ within the meaning of the Sixth Directive.
[36] That provision of the client base for the use of the new partnership is ‘free of charge’ and therefore does not fall within the scope of Article 2(1) of the Sixth Directive, which refers only to supplies of goods and services provided for consideration, nor within the scope of Article 4(1) and (2) of the Sixth Directive, which refers to the exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis." (Malburg C-204/13)
- Investment expenditure leading to capital contribution of goods as an economic activity
"[29] At the outset, it must be noted that it is apparent from paragraph 26 of Polski Trawertyn and from point 63 of the Advocate General’s Opinion on the case which gave rise to that judgment, that the facts which gave rise to that case were unique to it. Thus, the partners of a future company could not, under the applicable national legislation, rely on a right to deduct VAT on investment expenditure which they had incurred, in their personal capacity before the registration and identification of that company for the purposes of VAT, for the purposes of and with the view to commencement of its economic activity, because the contribution of the capital goods at issue was an exempt transaction. The Court, in the light of the facts so described, held that, in a situation such as that at issue in the main proceedings of that case, not only did that national legislation not permit that partnership to exercise the right to deduct VAT paid on the capital goods at issue, but it also prevented the partners who incurred the investment expenditure from exercising that right." (Malburg C-204/13)