7.3.2 Case 2

A foundation (a separate legal entity which is very often used in the Netherlands for not-for-profit activities) operates a socio-economic research centre. It carries out research activities which result in publications and it organizes congresses and seminars. Part of the research is done at the request of third, public and private, parties (‘contract research’). The research centre receives a large state subsidy which covers about 60% of all costs. The other 40% of the costs is covered by income which is generated by contract research, congresses and seminars. The scientists who are on the centre’s payroll are alternately involved in contract research and other research.

Does the foundation qualify as a taxable person for all its activities? Is part of the input VAT not deductible and if so, how is the non-deductible VAT calculated?

This entity is seen as a taxable person for the contract research and the congresses and seminars (insofar as admittance is not free). For the other activities the entity is typically not seen as a taxable person. To the extent that the input VAT is attributable to the non-economic activities, it is not deductible. There are no rules for the calculation of the non-deductible VAT, but typically it is determined by applying the percentage of total costs of non-economic activities.

Publicly funded research (‘PFR’) may be either a business or a non-business activity depending on the facts and in particular the intention of the foundation to commercially exploit the research. In University of Southampton v Revenue & Customs [2006] EWHC 528 (Ch) (17 March 2006), the UK High Court confirmed the judgment of the VAT Tribunal that PFR is not part of the ‘University’s VAT business’ and that PFR is not an activity the VAT on the costs of which could be recovered as VAT on overheads of the University’s VAT business.1 At the same time, the Court does not reject the possibility that a particular piece of PFR is carried out for the benefit of economic activities and that the PFR costs qualify as overheads.2

There are no specific rules for the calculation of the non-deductible input VAT.3 Section 5.8 of Manual V1-6 (Business/non-business) discusses various methods. The method which has the most ‘fair and reasonable’ result should be applied.

The foundation is a taxable entity, but not for all of its activities. The research carried out for its own purposes and without customers being involved does not form part of a business. Insofar as the foundation’s activities are economic activities, its transactions may be exempt if it is recognized as a not-for-profit organization, or they may be taxed at a reduced rate.4 The extent of the deductibility is unknown.5

The foundation is certainly in business for the publications, congress and seminars. The subsidies could, as the case may be, also be regarded as the consideration for certain researches. Assuming, however, that the foundation carries out non-business and business activities for VAT purposes, the input VAT would have to be allocated directly between non-business and business activities for each expense to determine the quantum of deductible VAT.6 A single ratio may be used per year for all expenses if this can be properly justified.7