Free Goods & Services – Can VAT be Recovered on Costs?

There are two recent cases which could have significant implications for recovery of VAT on expenses. Although the two cases differ in content they both address one main issue:

“Can VAT on expenses be recovered if there is no direct and immediate link to taxable income, but can be linked to the overall taxable activities of a business?”

The 1st is an ECJ case is Sveda UAB (C-126/14)

Sveba were an organisation who provided food, drink and accommodation to tourists. With the help of a subsidy from the local tourist board, they built a walk which featured Baltic mythology. However a condition of the subsidy was that visitors could use the walk for free for at least 5 years after construction.
VAT on construction costs was disallowed as there was no “direct and immediate link” to taxable supplies. In other words the public had free access to the themed path. Although this is a Lithuanian case VAT would equally have been disallowed in the UK using the same rationale.
The ECJ disagreed. They accepted the argument that an asset may be used free of charge, provided the free use has a taxable business purpose. Here the taxable business purposes was to attract more tourists who would buy more food, drink and accommodation from Sveda.

The other is Associated Newspapers Ltd (2015) UKUT 0641 (TCC)

This was an upper tribunal case where as part of a business promotion, vouchers were provided free if a person subscribed to the newspaper for a period of time.
HMRC argued that as the vouchers were given away free VAT couldn’t be reclaimed on their purchase, but if it could output tax was due as giving vouchers away for free represented a deemed supply of services.
In short the upper tribunal ruled there was no deemed supply of services, and VAT could be reclaimed on the voucher purchase, as the “direct and immediate link” was the intended increased circulation of the newspaper if a subscription was taken out , rather than the fact the vouchers were provided free.

WE now have two significant cases that support the principle that VAT incurred in providing free goods or services, can be reclaimed provided the overall intention of the business is to increase the businesses taxable supplies.
HMRC to date have been silent on this issue, given the potential for businesses to reclaim VAT. Obviously if anyone has not claimed or have had input tax disallowed in similar circumstances please get in touch.