“… there is a direct and immediate link between the Services and HLT’s downstream taxable general economic activities and … the chain is not broken by the share sale.”
“We accept that the first stage of the analysis is to be modified in fundraising cases in the sense that (with one rider) the initial share transaction is to be disregarded.”
“the chain will be broken where the cost of the inputs was a cost component of the price of the shares in the initial transaction” (see paragraph [36]). At [41] the FtT said: “We do not accept that the use of the Services for the fundraising transaction prevents deduction”
“46. We find that the cost of the Services was not incorporated in the price of the shares sold in (and were not cost components of the price of the shares in) the initial transaction. The agreed evidence is that the Shares were sold for the best price achievable in the market. The price was not increased in order to provide for the costs of the Services and there was no allocation for such costs within the sale price. We note in this regard that although there is no requirement for such increased price or allocation in order for the costs to be components of the price of the Shares, the presence of such increase or allocation would support the cost of the Services being cost components of the initial transaction. Instead, the Services were paid for out of the proceeds of sale, thus reducing the amount available for the taxable transactions and so being a cost of those taxable transactions. Further, for the reasons set out above, the objective purpose of incurring the costs of the Services was in order to raise the funds to pay for the downstream transactions.”
“In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay: (a) value added tax due or paid in respect of goods or services supplied or to be supplied to him by another taxable person; …”
“Article 1 1. This Directive establishes the common system of value added tax (VAT). 2. The principle of the common system of VAT entails the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, however many transactions take place in the production and distribution process before the stage at which the tax is charged. On each transaction, VAT, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of VAT borne directly by the various cost components. The common system of VAT shall be applied up to and including the retail trade stage.”
“Article 2 1. The following shall be subject to VAT: a. the supply of goods for consideration within the territory of a Member State by a taxable person acting as such; … c. The supply of services for consideration within the territory of a Member State by a taxable person acting as such; …” a. the supply of goods for consideration within the territory of a Member State by a taxable person acting as such; … c. The supply of services for consideration within the territory of a Member State by a taxable person acting as such; …”
“(f) transactions, including negotiation but not management or safekeeping, in shares …”
“Article 168 In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay: (a) the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person; …”
“(a) services used for the purpose of an exempt transaction such that input tax thereon is not deductible; (b) services used for the purpose of the taxable transactions (namely [BLP’s] core business of making taxable supplies) such that input tax thereon is deductible in whole; (c) services used for both exempt and taxable transactions such that input tax thereon is deductible in accordance with article 17(5) of the Sixth Directive?”
“30. A consideration of those provisions together shows that the Community legislature, proceeding from an ideal image of “chain 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 Commission of the European Communities v. French Republic (Case 50/87) [1988] E.C.R. 4797, 4817, para. 16. 31. On the question whether the goods or services supplied to taxable persons, on which input tax has been charged, can be attributed to a transaction by the taxable person in such a way that deduction of input tax is justified, the Community legislature decided on a criterion corresponding to the system: the amount which is to be deducted as input tax must have been “borne directly by the various cost components.” ”
“24. Moreover, if B.L.P’s interpretation were accepted, the authorities, when confronted with supplies which, as in the present case, are not objectively linked to taxable transactions, would have to carry out inquiries to determine the intention of the taxable person. Such an obligation would be contrary to the VAT system’s objectives of ensuring legal certainty and facilitating application of the tax by having regard, save in exceptional cases, to the objective character of the transaction in question. 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 advisors for the taxable person’s taxable transactions and that if B.L.P. 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 B.L.P. 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] E.C.R. 655, 664, para. 19.”
“28. The answer to question (1) must therefore be that article 2 of the First Directive and article 17 of the Sixth Directive are to be interpreted as meaning that, except in the cases expressly provided for by those Directives, where a taxable person supplies services to another taxable person who uses them for an exempt transaction, the latter person is not entitled to deduct the input VAT paid, even if the ultimate purpose of the transaction is the carrying out of a taxable transaction.”
“31. That having been said, I am of the opinion that, in circumstances such as those set out by the national court, there is always a “direct and immediate link” between a taxable transaction and the supply of certain goods or services whenever, in the light of an objective assessment (which it is for the national court to carry out), the goods or services are used by the taxable person to carry out one or more taxable transactions. Such a link exists, in particular, in accordance with the second paragraph of article 2 of the First Directive, if the amount of the tax paid in respect of the supply of a good or for the provision of a service was borne directly by the various cost components of the taxable transaction. The mere fact that a service (such as legal defence) was supplied as a consequence of a deductible transaction is not sufficient, however, for the purposes of deducting the whole of the VAT paid by a taxable person (such as the Midland) in respect of the supply of that service. Moreover, the link must be identifiable according to objective criteria - that generally means that the link should reflect the normal relationship between the two supplies, so that the second should follow the first not in a mechanical way, but according to the normal and regular order of causal chains.”
“25. In so far as the national court seeks, in the first part of the second question, clarification of the nature of the “direct and immediate link,” the Midland, the United Kingdom Government and the Commission rightly agree that it would not be realistic to attempt to be more specific in that regard. In view of the diversity of commercial and professional transactions, it is impossible to give a more appropriate reply as to the method of determining in every case the necessary relationship which must exist between the input and output transactions in order for input VAT to become deductible. It is for the national courts to apply the “direct and immediate link” test to the facts of each case before them and to take account of all the circumstances surrounding the transactions at issue.”
“29. It should be borne in mind that, according to the fundamental principle which underlies the VAT system, and which follows from article 2 of the First and Sixth Directives, VAT applies to each transaction by way of production or distribution after deduction of VAT directly borne by various cost components: see, to this effect, B.P. Supergas Anonimos Etairia Geniki Emporiki-Viomichaniki kai Antiprossopeion v. Greek State (Case C-62/93 ) [1995] E.C.R. 1-1883, 1913, para. 16. 30. It follows from that principle as well as from the rule enshrined in paragraph 19 of the judgment in B.L.P. Group Plc. v. Customs and Excise Commissioners (Case C-4/94 ) [1996] 1 W.L.R. 174, 198-199, 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 the B.L.P. judgment 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 article 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 article 17(5) of the Sixth Directive and the VAT is, according to that provision, deductible only in part.”
“32. Seen in that light, the position of exempt supplies is anomalous in the scheme of VAT, particularly where they are cost components of subsequent taxable supplies. Their full cost, including the VAT levied on inputs, will – presumably – be reflected in the price charged. In that situation, there will be double or cumulative taxation, since VAT will be charged in full on an output one of whose cost components already includes VAT. There is a potentially serious departure from the principle on which VAT is levied in that a chain of supplies may be broken in this manner at more than one point, with a concomitant repetition of cumulative taxation. Such factors suggest that the treatment accorded to exemptions should be applied restrictively: to the extent possible, the VAT treatment of each transaction should conform to the basic principle, in order to avoid distortions. (The court has recognised that the terms used to specify the exemptions envisaged by article 13 are to be interpreted strictly, since they constitute exemptions to the general principle that VAT is levied on all supplies made for consideration by a taxable person: see, for example, Stichting Uitvoering Financiële Acties v Staatssecretaris van Financiën (Case 348/87) [1989] ECR 1737, para 13, and more recently, Gregg v Customs and Excise Comrs (Case C-216/97 ) [1999] ECR 1-4947, 4973, para 12.)”
“34. However, in other cases the court has taken what appears to be a broader approach. In Leesportefeuille “Intiem”
“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.”
“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” (see paragraph [35]). It went on: “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.”
“40. So if the various services acquired by the transferor in order to effect the transfer of a totality of assets or part thereof have a direct and immediate link with a clearly defined part of his economic activities, so that the costs of those services form part of the overheads of that part of the business, and all the transactions relating to that part are subject to VAT, he may deduct all the VAT charged on his costs of acquiring those services.”
“42. The answer to the questions referred must therefore be that, where a member state has made use of the option in article 5(8) of the Sixth Directive, so that the transfer of a totality of assets or part thereof is regarded as not being a supply of goods, the costs incurred by the transferor for services acquired in order to effect that transfer form part of that taxable person’s overheads and thus in principle have a direct and immediate link with the whole of his economic activity. If, therefore, the transferor effects both transactions in respect of which VAT is deductible and transactions in respect of which it is not, it follows from article 17(5) of the Sixth Directive that he may deduct only that proportion of the VAT which is attributable to the former transactions. However, if the various services acquired by the transferor in order to effect the transfer have a direct and immediate link with a clearly defined part of his economic activities, so that the costs of those services form part of the overheads of that part of the business, and all the transactions relating to that part of the business are subject to VAT, he may deduct all of the VAT charged on his costs of acquiring those services.”
“36. In this case, regard being had to the fact that, first, a share issue is an operation not falling within the scope of the Sixth Directive and, secondly, that operation was carried out by the claimant 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 the BLP Group case[1996] 1 WLR 174 , 199, para 25; the Midland Bank case[2000] 1 WLR 2080 , 2100, para 31; the Abbey National case[2001] 1 WLR 769 , 787, paras 35 and 36, and the Cibo Participations case [2001] ECR 1-6663, 6693, para 33. 37. It follows that, under article 17(1) [and] (2) of the Sixth Directive, the claimant 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 sub-paragraph of article 17(5) of the Sixth Directive, deduct only that proportion of VAT which is attributable to the former transactions: the Abbey National case, para 37, and the Cibo Participations case, para 34.”
“80. Further, the consequence of allowing a right to deduct input VAT when the transaction on which VAT is charged has a direct and immediate link to an output share disposal transaction covered by the exemption of art 13B(d)(5) of the Sixth Directive, would be that a new opportunity to deduct input VAT would be created by judicial decision.”
“(3) A taxable person who has acquired supplies of services in order to carry out a disposal of shares in a subsidiary and in a controlled company, a transaction which is covered by the exemption provided for by art 13B(d)(5) of the Sixth Directive 77/388, as amended by the Directive 2006/112, and by art 135(1)(f) of the Directive 2006/112, and with which those services have a direct and immediate link, does not have the right to deduct input value added tax on those services, even when the disposal of shares is a transaction which contributes to the objective of restructuring the taxable person’s industrial activities.”
“59. On the other hand, 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 …”
“60. It follows that whether there is a right to deduct is determined by the nature of the output transactions to which the input transactions are assigned. Accordingly, there is a right to deduct when the input transaction subject to VAT has a direct and immediate link with one or more output transactions giving rise to the right to deduct. If that is not the case, it is necessary to examine whether the costs incurred to acquire the input goods or services are part of the general costs linked to the taxable person’s overall economic activity. In either case, whether there is a direct and immediate link is based on the premise that the cost of the input services is incorporated either in the cost of the particular output transactions or in the cost of goods or services supplied by the taxable person as part of his economic activities.”
“61. In the present case, the referring court describes the costs linked to the services acquired by SKF, first, as ‘directly attributable’ to the disposal of shares and, second, as forming part of the general costs associated with SKF’s overall economic activities. 62. In that regard, it must be held that it is not possible from the case file submitted to the court to determine whether those costs have a direct and immediate link, within the meaning of the case law cited in paras 57 and 58 of this judgment, with the envisaged share disposals or with SKF’s overall economic activity, given that, according to the referring court, the purpose of those transactions was to secure funds to finance other activities of the group. In order to establish whether there is such a direct and immediate link, it is necessary to ascertain whether the costs incurred are likely to be incorporated in the prices of the shares with SKF intends to sell or whether they are only among the cost components of SKF’s products. 63. However, in proceedings brought under art 234 EC, since the court has no jurisdiction to assess or characterise the factual circumstances which gave rise to the questions referred for a preliminary ruling, it is for the referring court to apply the direct and immediate-link test to the facts of the case in the main proceedings and to take account of all the circumstances surrounding the transactions at issue (see, to that effect, Midland Bank (para 25)).”
“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 transaction 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 the 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 the 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, Kingcrest Associates Ltd v Customs and Excise Comrs (Case C-498/03 )[2005] STC 1547 , [2005] ECR 1-4437, para 41; Turn-und Sportunion Waldburg v Finanzlandesdirektion für Oberösterreich (Case C-246/04 )[2006] STC 1506 , [2006] ECR 1-589, para 33; and R (on the application of Teleos plc) v Revenue and Customs Comrs (Case C-409/04 )[2008] STC 706 ,[2008] QB 500 , 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 1-4947, para 20, and Revenue and Customs Comrs v Isle of Wight Council (Case C-288/07 )[2008] STC 2964 , [2008] ECR 1-7203, 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. 69. That interpretation is borne out by the purpose of the common system introduced by the Sixth Directive, which is, in particular, to secure equal treatment for taxable persons (see, inter alia, Muys’ en de Winter’s Bouw-en-Aannemingsbedrijf BV v Staatssecretaris van Financiën (Case C-281/91 )[1997] STC 665 ECR 1-5405, para 14). That principle would be disregarded if the costs incurred by a parent company managing a group of companies in connection with a sale of shares which is part of its economic activity were to be taxable, while a holding company which carries out the same transaction outside the scope of VAT would be entitled to deduct VAT paid on the same costs by reason of the fact that those costs form part of the general costs of its overall economic activity. 70. Any other interpretation would burden the trader with the cost of VAT in the course of his economic activity without giving him the possibility of deducting it (see, to that effect, Gabalfrisa SL v Agencia Estatal de Administración Tributaria (Joined cases C-110/98 to C147/98)[2002] STC 535 , [2000] ECR 1-1577, para 45, and Abbey National (para 35)). 71. In the case in the main proceedings, while it is admittedly true, as is correctly argued by the Skatteverket and by the Swedish, German and United Kingdom governments, that a disposal of shares which is exempt from VAT does not give rise to a right to deduct, the fact remains that that interpretation holds true only if a direct and immediate link is established between the input services and the exempted disposal of shares as an output transaction. If, on the other hand, there is no such link and the cost of the input transactions is incorporated in the prices of SKF’s products, the right to deduct VAT charged on the input services should be allowed. 72. It must, lastly, be stated that there is a right to deduct input VAT in respect of services carried out in connection with financial transactions if the capital acquired by means of those transactions is used in connection with the economic activities of the person concerned. Furthermore, the costs associated with input services have a direct and immediate link to the taxable person’s economic activities in circumstances where they are solely attributable to downstream economic activities and consequently are among only the cost components of transactions within the scope of those activities (see Securenta, paras 28 and 29). 73. It follows from the foregoing that the answer to the third question is that there is a right to deduct input VAT paid on services supplied for the purposes of a disposal of shares, under art 17(1) and (2) of the Sixth Directive, as amended by art 28f(1) thereof, and art 168 of Directive 2006/112, if there is a direct and immediate link between the costs associated with the input services and the overall economic activities of the taxable person. It is for the referring court to take account of all the circumstances surrounding the transactions at issue in the main proceedings and to determine whether the costs incurred are likely to be incorporated in the price of the shares sold or whether they are among only the cost components of transactions within the scope of the taxable person’s economic activities.”
“80. … 3. There is a right to deduct input value added tax paid on services supplied for the purposes of a disposal of shares, under art 17(1) and (2) of Sixth Directive 77/338, as amended by Directive 95/7, and art 168 of Directive 2006/112, if there is a direct and immediate link between the costs associated with the input services and the overall economic activities of the taxable person. It is for the referring court to take account of all the circumstances surrounding the transactions at issue in the main proceedings and to determine whether the costs incurred are likely to be incorporated in the price of the shares sold, or if they are among only the cost components of transactions within the scope of the taxable person’s economic activities.”
“32. In BLP Group, the court came to the general conclusion on this question that a direct and immediate link of the acquired goods or services with the taxable transactions is necessary and that the ‘ultimate’ aim pursued by the taxable person is irrelevant in this respect. The court therefore refused the deduction of input VAT in a situation in which services had been provided to the taxable person in relation to the exempt sale of shares, even though this sale was a means of enabling the taxable activity of the taxable person. In other words, the court made a distinction in this case between the solely decisive primary and the merely secondary use of an input transaction.”
“33. However, the court has further developed its case law since that case. It still remains the case that for art 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 be 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.”
“41. However, should the national court find that the creation of the recreational path by Sveda does not represent a taxed transaction, the right of deduction would then depend solely on whether the capital goods of the recreational path are used, for the purposes of art 168 of the VAT Directive, for the provision of chargeable services to visitors in the future. For that to be the case, the costs of the acquisition and manufacture of these capital goods would have to be incorporated into the cost of these services.”
“27. According to settled case law, the existence of a direct and immediate link between a particular input transaction and a particular output transaction or transactions giving rise to an entitlement to deduct is, in principle, necessary before the taxable person is entitled to deduct input VAT and in order to determine the extent of such entitlement. 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, inter alia, judgment in SKF, para 57). 28. Nevertheless, as the Advocate General observed in points 33 and 34 of her opinion, the court has held that a taxable person also has the 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 expenditure incurred is part of his general costs and are, as such, components of the price of the goods or services which he supplies. Such expenditure does have a direct and immediate link with the taxable person’s economic activity as a whole (see, to that effect, judgments in Investrand BV v Staatssecretaris van Financiën (Case C-435/05 )[2008] STC 518 , [2007] ECR 1-1315, para 24, and SKF, para 58). 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 criteria of the transaction in question (see, to that effect, judgment in Finanzamt Köln-Nord v Becker (Case C-104/12 ) (21 February 2013 , unreported), paras 22, 23 and 33 and the case law cited).”
“43. In this case, it is apparent from the order for reference that the general costs at issue in the main proceedings have a direct and immediate link with the activities of VWFS as a whole, and not merely with some of them. In that regard, the fact that VWFS decided to include those costs not in the price of the taxable transactions, but solely in the price of the exempt transactions, can have no effect whatsoever on such a finding of fact.”
“More recently, the CJEU has called into question its ruling in the BLP [sic] in the light of its developing jurisprudence attributing input expenditure on the raising of capital to the general overheads of an undertaking”
“43. The CJEU disagreed with his conclusion in relation to an exempt transaction involving a sale of shares in circumstances which were analogous to the facts of the case and held (para 73) that there was a right to deduct input VAT paid on services acquired for the purposes of a disposal of shares “if there is a direct and immediate link between the costs associated with the input services and the overall economic activities of the taxable person”
“… In my view it is implicit in the CJEU’s reasoning that it accepted the distinction which Advocate General Jacobs made in his opinions in Abbey National and Kretztechnik but recognised the need to modify the result for the purpose of VAT of an exempt initial transaction in order to avoid discriminatory fiscal treatment”
“47. It is important to consider further the statement in para 59 of the judgment, summarised in para 44(iv) above. It was that, in contrast to the circumstance where the costs of services are part of a taxable person’s general costs and components of the price of the goods and services which he supplies (para 58), “where goods and 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”
“49. In my view, it is clear that in SKF … the CJEU has not extended the reasoning of BLP … to apply it to fund-raising transactions which are outside the scope of VAT. On the contrary, in order to avoid discriminatory treatment of taxable persons, it has extended the reasoning in the cases about share disposals that are outside the scope of VAT to share disposals which are exempt, by requiring an examination as to whether the costs associated with the input services are incorporated in the price of the shares sold in the initial transaction or in the prices of the taxable person’s products in downstream transactions. If the latter, the costs would be “among only the cost components of transactions within the scope of the taxable person’s economic activities”.”
“(ii) There must be a direct and immediate link between the goods and services which the taxable person has acquired (in other words the particular input transaction) and the taxable supplies which that person makes (in other words its particular output transaction or transactions). This link gives rise to the right to deduct. The needed link exists if the acquired goods and services are part of the cost components of that person’s taxable transactions which utilise those goods and services: see for example Midland Bank[2000] 1 WLR 2080 , paras 24 and 30; Abbey National, para 28; Kretztechnik, para 35; Securenta[2008] STC 3473 , para 27; SKF, para 57 and Revenue and Customs Comrs v University of Cambridge EU:C:2019:559, para 31. (iii) Alternatively, there must be a direct and immediate link between those acquired goods and services and the whole of the taxable person’s economic activity because their cost forms part of that business’s overheads and thus a component part of the price of its products: see for example BLP[1996] 1 WLR 174 , para 25; Midland Bank, para 31; Abbey National paras 35 and 36; Kretztechnik, para 36; SKF, para 58 and University of Cambridge, para 31. (iv) Where the taxable person acquires professional services for an initial fund-raising transaction which is outside the scope of VAT, that use of the services does not prevent it from deducting the VAT payable on those services as input tax and retaining that deduction if its purpose in fund-raising, objectively ascertained, was to fund its economic activity and it later uses the funds raised to develop its business of providing taxable supplies. See, for example, Abbey National, paras 34-36; Kretztechnik, paras 36-38; Securenta, paras 27-29 and SKF, para 64. The same may apply if an analogous transaction involving the sale of shares is classified as an exempt transaction: SKF, para 68.”
“That principle is not a rule of primary law which can condition the validity of an exemption, but a principle of interpretation, to be applied concurrently with the principle of strict interpretation of exemptions”
“37. [Midland] confirms that to be treated as a cost component of the business as a whole there must be a direct and immediate link with the whole of the taxable person’s economic activity rather than with any particular supply. In most cases the purchase of goods or services for use as part of a business will always qualify as overheads with a concomitant right to recover the input tax subject only to arguments about apportionment if the business is not wholly a taxable economic activity. And the real question therefore is how to determine when, as in BLP, the supply of goods or services falls to be treated as linked to a particular output supply as opposed to the business as a whole. To some extent this may depend upon the nature of the supplies on which the input tax arises. The purchase by a company of, for example, stationery or secretarial services is more likely to be linked to the business as a whole than to any particular supply which the taxable person makes. But when the goods or services are acquired specifically in order to satisfy an order from a customer or to make some other identifiable supply, their treatment as cost components of that particular supply may become unavoidable.”
“47. It seems to me that the CJEU has clearly moved away in these recent decisions from any disregard of the ultimate economic purpose of the relevant expenditure in considering whether it should be treated as linked to the taxpayer’s wider economic activities. This is not a question of subjective intent but requires an objective analysis in terms of the taxpayer’s identifiable economic activities of why the input supplies were acquired. Although there must, I think, be some evidence that the cost of the input supplies was passed on as part of the cost of the supplies which the taxable person subsequently makes, the absorption of those costs as part of the expenditure of running the business is not to be ignored merely because they also facilitated the making of supplies which in themselves were either exempt or outside the scope of the PVD.”
“17. The reference to ‘costs components’ in art 1 might suggest that the cost of the goods or services supplied to the taxable person must be reflected in the price charged for the relevant output supplies made by the taxable person. That is not, however, the case. As art 168 makes clear, it is the fact that the goods or services supplied to the taxable person are used ‘for the purposes of’ the taxed supplies made by the taxable person that gives rise to the right of deduction. The taxable person’s purpose is to be objectively ascertained from the facts and circumstances of the transactions, not by investigating the subjective intentions of the taxable person.”
“16. It is true that the transactions referred to in art 13B(d)(5) of the Sixth Directive may fall within the scope of VAT where they are effected as part of a commercial share dealing activity, in order to secure a direct or indirect involvement in the management of the companies in which the holding has been acquired or where they constitute the direct, permanent and necessary extension of the taxable activity (see Polysar Investments[1993] STC 222 at 239, [1991] ECR 1-3111 at 3137, para 14; Wellcome Trust Ltd v Customs and Excise Comrs (Case C-155/94 )[1996] STC 945 at 959, para 35; and Régie Dauphinoise – Cabinet A Forest SARL v Ministre du Budget (Case C-306/94 )[1996] STC 1176 at 1191, para 18).”
“designed to simplify and facilitate the collection of tax by treating the representative member as if it were carrying on all the businesses of the other members as well as its own, and dealing on behalf of them all with non-members”
“49. By virtue of the single taxable person fiction, as applied by s43(1) of the VATA, the group is to be treated as carrying on all the businesses carried on by group companies. That fiction does not, however, change the nature of those businesses. They remain separate businesses as a matter of fact. The fiction does not extend to treating the group as carrying on a different, amalgamated, business in which the separate businesses of the group lose their individual identity. That is clear, in our view, from the opinions of the House of Lords in Customs and Excise Comrs v Thorn Materials Supply Ltd and Thorn Resources Ltd[1998] STC 725 ,[1998] 1 WLR 1106 , in particular that of Lord Nolan ([1998] STC 725 at 733,[1998] 1 WLR 1106 at 1113), where his Lordship referred to the representative member of the group being treated ‘as if it were carrying on all the businesses of the other [group] members as well as its own’. We accept, in this respect, Mr Pleming’s submission that this is the case whether or not those individual businesses themselves make supplies outside the group.
“57. HLT’s argument is that the supplies are to be disregarded and so the economic activity is to be disregarded. However, this would overlook the fact that the group members are still to be treated as having a separate existence with transactions taking place. Given that it is the transactions which constitute economic activity, the economic activity (as opposed to the VAT supplies the economic activity gives rise to) is not to be ignored.”