© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
M3. Overheads
GENERAL
- General costs with no direct link to a particular output transaction giving rise to right to deduct may have direct link to business as a whole
"[26] However, a taxable person also has a right to deduct even where there is no direct and immediate link between a particular input transaction and an output transaction or transactions giving rise to the right to deduct, where the costs of the goods or services in question are part of his general costs and are, as such, components of the price of the goods or services which he supplies, as such costs do have a direct and immediate link with the taxable person’s economic activity as a whole (judgment of 14 September 2017, Iberdrola Inmobiliaria Real Estate Investments, C‑132/16, EU:C:2017:683, paragraph 29 and the case-law cited)." (University of Cambridge C-316/18)
Cost component of activity as a whole
- Not a cost component of activity as a whole were inputs used to generate funds to reduce prices
"[32] However, in the present case, it is apparent from the documents before the Court that, first, costs relating to the management of donations and endowments invested in the fund concerned are not incorporated into the price of a particular output transaction. Second, as it is apparent from the documents before the Court that (i) the University of Cambridge is a not-for-profit educational establishment and (ii) the costs at issue are incurred in order to generate resources that are used to finance all of that university’s output transactions, thus allowing the price of the goods and services provided by the latter to be reduced, those costs cannot be considered to be components of those prices and, consequently, do not form part of that university’s overheads. In any event, as there is no direct and immediate link in the present case either between those costs and a particular output transaction or between those costs and the activities of the University of Cambridge as a whole, the VAT relating to those costs is not deductible." (University of Cambridge C-316/18)
"[98]...The court first held that in raising and collecting donations and endowments the University was not acting as a taxable person. It followed that the input VAT paid in respect of any costs incurred in that regard was not deductible "regardless of the reason why those donations and endowments were received": para 29. Further, the funds generated were not a cost component of any particular output transaction, on the contrary they were used to reduce the price that had to be charged for the goods and services provided by the University." (Hotel La Tour Ltd v. HMRC [2025] UKSC 46)
- Investing donations to generate income to "cover the costs" of activity not overheads of activity
"[33] In the light of the findings above, the answer to the questions referred is that Article 168(a) of the VAT Directive must be interpreted as meaning that a taxable person that (i) is carrying out both taxable and exempt activities, (ii) invests the donations and endowments that it receives by placing them in a fund and (iii) uses the income generated by that fund to cover the costs of all of those activities is not entitled to deduct, as an overhead, input VAT paid in respect of the costs associated with that investment." (University of Cambridge C-316/18)
OUTSIDE THE SCOPE TRANSACTION
- Immediate use for outside the scope transaction does not prevent input being overheads
"[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)." (Kretztechnik C-465/03)
- Immediate use for non-economic activity does not preclude the costs giving rise to right to deduct
"[31] It is true that the fact that costs are incurred in the acquisition of a service in the context of a non-economic activity does not, in itself, preclude those costs giving rise to a right to deduct in the context of the taxable person’s economic activity, if they are incorporated into the price of particular output transactions or into the price of goods and services provided by the taxable person in the context of that economic activity (see, to that effect, judgment of 26 May 2005, Kretztechnik, C‑465/03, EU:C:2005:320, paragraph 36)." (University of Cambridge C-316/18)
Examples
- Share issue is outside the scope so full recovery if capital raised for taxable business
"[37] It follows that, under Article 17(1) and (2) of the Sixth Directive, Kretztechnik is entitled to deduct all the VAT charged on the expenses incurred by that company for the various supplies which it acquired in the context of the share issue carried out by it, provided, however, that all the transactions carried out by that company in the context of its economic activity constitute taxed transactions. A taxable person who effects both transactions in respect of which VAT is deductible and transactions in respect of which it is not may, under the first subparagraph of Article 17(5) of the Sixth Directive, deduct only that proportion of the VAT which is attributable to the former transactions (Abbey National, paragraph 37, and Cibo Participations, paragraph 34)." (Kretztechnik C-465/03)