Section 141.02

Subsection 141.02(1)

Direct Input

Procurative Extent

See Also

Associated Newspapers Ltd v HM Revenue & Customs, [2017] EWCA Civ 54, [2017] BVC 10

purchases made for promotional free on-supplies were part of the VAT-creditable overheads of a taxable business

The appellant (“ANL”) promoted circulation of its Sunday newspapers by first purchasing vouchers from retailers such as Marks & Spencer and from an intermediary ("Hut"), and providing such vouchers to readers, who purchased the newspaper during the promotional period, who then could redeem the vouchers with the retailer against the purchase of goods. (The purchases of vouchers from Marks & Spencer were found later in the judgment to not be subject to VAT.) Patten LJ noted (at para. 30) that in order for ANL to be entitled to recover any input tax on its purchases of the vouchers, the applicable legislation required that ANL establish either a direct and immediate link between the purchased vouchers (which were deemed to be for services) and relevant taxable transactions of ANL or that the cost of the vouchers were part of the ANL overheads and, therefore, cost components of the its taxable activities – but that if its purchases of the vouchers should be treated as directly (and exclusively) linked to the free supply of the vouchers to its customers, any input tax would be irrecoverable.

In addressing this issue, Patten LJ discussed at length the Sveda case (ECLI:EU:C:2015:712), [2015] BVC 36), which found input tax to be recoverable on goods purchased in constructing a 'Baltic mythology recreational/discovery path,' which was subsidised by the Lithuanian government on the basis that there would be free public access to it, but with Sveda intending to sell food or souvenirs. Patten LJ then stated, in connection with finding that ANL was entitled to input tax under the Sveda principle (at paras 48, 51):

[I]n economic terms, the cost of purchasing the vouchers was also part of ANL's overall expenditure in the production and sale of its newspapers which the vouchers were intended to promote. The fact that the vouchers were provided free to buyers of the newspapers merely serves to confirm that they were cost components of the business rather than the onward supply of the vouchers.

… [A] simple causative test of whether the newspapers could have been produced and sold without the benefit of the vouchers does not answer the question of whether the cost of the vouchers was economically a cost component of those supplies and that business when the vouchers were acquired in order to sell the papers.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 141.01 - Subsection 141.01(2) acquisition made for free on-supply was part of overhead of a commercial activity 155

Subsection 141.02(6)

Administrative Policy

26 September 2018 Interpretation 167875

tracking of inputs preferred/cost pool use cannot change results
  • Most inputs are likely to be allocable as “exclusive” or “direct” inputs rather than being “non-attributable” inputs.
  • Direct tracking of inputs should be used where possible rather than “causal allocation,” i.e., using a systematic methodology to approximate the use of inputs.
  • Generally, the categorization and allocation of business inputs must be done on an input-by-input basis and not based on “cost pools” of business inputs. The latter “are only appropriate where the use of grouping or pooling of business inputs results in the same ITC allocation result as would be arrived at if each business input was allocated without the use.
Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 141.02 - Subsection 141.02(12) use of tracking, causal allocations and cost pools in ITC determinations 380

Subsection 141.02(12)

Administrative Policy

26 September 2018 Interpretation 167875

use of tracking, causal allocations and cost pools in ITC determinations

Financial institution X, a publicly traded listed financial institution under s. 149(1)(a), is engaged both in making taxable supplies of and in making exempt supplies of financial services including the issuance, sale, and purchase of financial instruments. It has categorized the inputs at issue either as type 1 expenses, meaning those inputs which are related to certain financial instruments, or “overhead” expenses, meaning those inputs not related to certain financial instruments.

In commenting on the application of s. 141.02, CRA indicated that “in general, a substantial portion of a financial institution’s inputs that are not excluded inputs will be allocated through the rules for exclusive inputs or the direct attribution method for direct inputs, and will not be non-attributable inputs,” whereas here, there appeared to be exclusive inputs included in both the “overhead” pool and type 1 pool that were not so categorized.

After noting that, as financial institution X had not made an s. 141.02(9) election, it was required to use a direct attribution method, in determining the operative and procurative extent of each direct input, and that conformed to the criteria, rules, terms and conditions specified by the Minister in B-106, it indicated that as “tracking the use of a particular input is more direct than approximating the use of the input through causal allocation or input-based or output-based allocation,” tracking should be used “to the extent possible,” and that:

To the extent that tracking is not possible, [financial institution X] must use causal allocation to the extent possible. Causal allocation directly approximates to the extent possible the use of a particular input using a systematic approach and an appropriate allocation base which provides a reasonable approximation of the use or intended use of a business input.

CRA went on to note that the following principle had not been adhered to:

Generally, the categorization and allocation of business inputs must be done on an input-by-input basis and not based on a group of business inputs. If cost pools are used, all the business inputs within a cost pool must be included in a single business input category (for example, be included in the direct input category) and must be acquired, or be consumed or used, to the same extent for the purpose of making taxable supplies for consideration or other purposes.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 141.02 - Subsection 141.02(6) tracking of inputs preferred/cost pool use cannot change results 102