Statutory expenditure and attribution of VAT

The CJEU has held that the existence of a statutory obligation to acquire certain equipment is not sufficient by itself to create a direct and immediate link with economic activities as a whole so as to give a right to deduct input VAT based on the proportion of taxable supplies: Oblastní nemocnice Kolín, a. s., nemocnice Středočeského kraje v Odvolací finanční ředitelství (Case C 513/24). Therefore, in this case, the fact that the business was required to have certain equipment in order to carry on a healthcare business did not mean that expenditure on that equipment could necessarily be attributed to the business as a whole, including taxable services which depended on the existence of the (largely exempt) healthcare business. What was necessary was an item by item review to determine its actual or intended use to establish a direct and immediate link with particular parts (or possibly the whole) of the business.

Background

The case concerns input VAT incurred in connection with the setting up of a hospital in the Czech Republic. Under Czech law, the trader was required to have in place minimum levels of equipment in order to obtain a licence to operate as a healthcare provider. However, the business ultimately established not only made VAT exempt healthcare supplies, but also certain taxable healthcare supplies (such as gynaecological healthcare services) and other additional taxable services (such as clinical studies and internships for trainee doctors).

The taxpayer argued that the VAT incurred on the acquisition of minimum levels of equipment should be treated as attributable to its business as a whole and deductible as general overheads in proportion to its taxable supplies. In essence, the taxpayer argued that the equipment was necessary for it to have a licence to operate as a healthcare business which in turn was necessary for it to carry on the taxable healthcare and additional services and that created the necessary nexus between the expenditure and its taxable business. The Czech tax authorities rejected this approach and the domestic courts referred the question to the CJEU.

Decision of the CJEU

The CJEU has rejected the argument that the existence of a statutory obligation to purchase the equipment in order to obtain a licence to conduct a healthcare business (including the additional healthcare related services) was sufficient to establish a direct and immediate link to the business as a whole. It is necessary for there to be an objective relationship between the input and output transactions or the business as a whole taking into account the actual use of the goods/services and the reason for the purchase. In essence, the mere fact that the equipment was a necessity to carry on a healthcare business and the carrying on of a healthcare business was a necessity for providing the additional taxable services was not a sufficient direct and immediate link. The national legislation might, however, be seen as one factor to be taken into account when assessing the direct and immediate link.

Rather it was necessary to look at the items acquired on an individual basis and determine whether that item had a direct and immediate link with specific activities or, failing that, the business as a whole. That was in principle a matter for the domestic courts, however the CJEU went on to provide further guidance. The Court noted that in this case it appears that the technical equipment appears primarily to be used for the provision of healthcare services and not the additional services. However, if it could be shown that technical equipment was intended to be used for both taxable and exempt healthcare services, then input VAT should be attributed between those uses. The Court offered the possible example of a defibrillator required to for a licence but intended for use in both taxable and exempt healthcare services.

Again, if it could be shown the equipment was actually necessary for the supply of additional services as well as exempt healthcare, then it would be possible to show a sufficient direct link (even if it was not actually used during the provision of such services).

It would only be where the equipment had no direct and immediate link to one or more specific output transactions that it would be necessary to determine if it had a direct and immediate link to the business as a whole as part of the taxpayer's general costs. The Court offered the example where certain facilities had particular equipment for reasons of safety or comfort.

Comment

The decision is not surprising in rejecting what essentially amounts to a "but for" approach to input VAT attribution. It is simply not sufficient to argue that the relevant activities could not have been provided "but for" the relevant expenditure. The "direct and immediate" test of input VAT attribution requires a much closer nexus between expenditure and use, such that even a statutory requirement to have in place certain equipment to carry out healthcare services on which the additional services depended was an insufficient link.