In which ‘Little Red Riding Hood’ defeats the Lithuanian VAT Wolf, writes Graham Elliott.
The Lithuanian story of Sveda UAB (C-126/14) has a somewhat fairytale overtone. It starts with a commercial company which keeps a shop, deep in a dark wood. People travel to the shop, but the route is hard and wearisome. The company cannot afford improvements, but one fine day a government quango visits the shop and agrees to meet 90% of the company’s cost, in order to create a delightful woodland pathway – all the better to let people visit it.
Brimming with gratitude, the company spends the money, reclaims all the VAT on the entire budget, and invites everyone to visit the shop. Of course, there are many visitors who, so enchanted with the path, stay on it, and never enter the shop. But both the company and the quango are happy with this, since the people benefit, and the shop sales increase to some extent.
Along came the Lithuanian VAT Wolf. It tried to eat up all of the input tax. It said the people did not pay to use the lovely new path, so there was no direct link to the supplies in the woodland shop. It said that the company had not born the cost, except for 10%, so it should not reclaim all of the VAT. It ate up all the VAT, and lay down to sleep, licking its lips.
The company ran to the CJEU to get help. The CJEU had to decide whether the Wolf was right that the costs related to something that was simply given away, and had insufficient connection with the shop; or right that the company had not born the true economic cost so could not reclaim the VAT. The company faced up to the Wolf. The Wolf called on his friend, HMRC, to help defeat the company in this trial of strength.
The CJEU decided that the VAT was all recoverable. It did not matter that the company did not charge the people for using the path, or that a direct purpose of the cost was to create a free-to-use facility. The fact that it also created better access to the shop meant the cost was directly and immediately linked to the sales from that shop. The question of how the money had been found to afford the improvement was irrelevant. All of the VAT initially claimed on this basis could be kept by the company as long as it continued to use the facility in connection with the shop, irrespective of whether free access was allowed to the public.
The Lithuanian VAT Wolf was slain, along with its friend, HMRC. And everyone lived (walked, and shopped) happily ever after.
And, in very real terms, this story has a happy ending for businesses and for charities. For some time, HMRC has tried to press forward with an ungenerous theory whereby input tax recovery should be directly referable to the commercial success achieved (or intended to be achieved) from the costs incurred. This has threatened to disturb the neutrality of the tax. The CJEU has reasserted the point that, as long as there is a sufficient link with the making of taxable supplies, the fact that there is a further ancillary benefit which was not necessarily paid for does not invalidate full input tax recovery. HMRC’s restless search to disallow VAT on costs which they believe have benefited non-commercial activities, despite having a clear link with taxable supplies, should now be regarded as having reached its end.
In which ‘Little Red Riding Hood’ defeats the Lithuanian VAT Wolf, writes Graham Elliott.
The Lithuanian story of Sveda UAB (C-126/14) has a somewhat fairytale overtone. It starts with a commercial company which keeps a shop, deep in a dark wood. People travel to the shop, but the route is hard and wearisome. The company cannot afford improvements, but one fine day a government quango visits the shop and agrees to meet 90% of the company’s cost, in order to create a delightful woodland pathway – all the better to let people visit it.
Brimming with gratitude, the company spends the money, reclaims all the VAT on the entire budget, and invites everyone to visit the shop. Of course, there are many visitors who, so enchanted with the path, stay on it, and never enter the shop. But both the company and the quango are happy with this, since the people benefit, and the shop sales increase to some extent.
Along came the Lithuanian VAT Wolf. It tried to eat up all of the input tax. It said the people did not pay to use the lovely new path, so there was no direct link to the supplies in the woodland shop. It said that the company had not born the cost, except for 10%, so it should not reclaim all of the VAT. It ate up all the VAT, and lay down to sleep, licking its lips.
The company ran to the CJEU to get help. The CJEU had to decide whether the Wolf was right that the costs related to something that was simply given away, and had insufficient connection with the shop; or right that the company had not born the true economic cost so could not reclaim the VAT. The company faced up to the Wolf. The Wolf called on his friend, HMRC, to help defeat the company in this trial of strength.
The CJEU decided that the VAT was all recoverable. It did not matter that the company did not charge the people for using the path, or that a direct purpose of the cost was to create a free-to-use facility. The fact that it also created better access to the shop meant the cost was directly and immediately linked to the sales from that shop. The question of how the money had been found to afford the improvement was irrelevant. All of the VAT initially claimed on this basis could be kept by the company as long as it continued to use the facility in connection with the shop, irrespective of whether free access was allowed to the public.
The Lithuanian VAT Wolf was slain, along with its friend, HMRC. And everyone lived (walked, and shopped) happily ever after.
And, in very real terms, this story has a happy ending for businesses and for charities. For some time, HMRC has tried to press forward with an ungenerous theory whereby input tax recovery should be directly referable to the commercial success achieved (or intended to be achieved) from the costs incurred. This has threatened to disturb the neutrality of the tax. The CJEU has reasserted the point that, as long as there is a sufficient link with the making of taxable supplies, the fact that there is a further ancillary benefit which was not necessarily paid for does not invalidate full input tax recovery. HMRC’s restless search to disallow VAT on costs which they believe have benefited non-commercial activities, despite having a clear link with taxable supplies, should now be regarded as having reached its end.
