The Durham Cathedral VAT Tribunal. Paganism, Trollope and a bit on the meaning of business and Sveda
The Durham cathedral case was about VAT recovery and non business.
The 2015 European Court decision in the Sveda VAT appeal generated a lot of interest as it implied that a person granting free admission to a building, museum or attraction may still be wholly in business for VAT purposes. This would mean they do not need to apply a non business VAT recovery restriction and HMRC policy is wrong.
Charity VAT advisors have been waiting for either an HMRC reaction to the case or for the Courts to consider its implications. In the VAT Tribunal concerning Durham Cathedral this has finally happened – but unfortunately the decision hasn’t really answered the main questions about the meaning of Sveda.
First a reminder about what Sveda was about. It was a case concerned with whether VAT could be recovered on the construction of a heritage trail. This was a landscaped attraction with paths, sculptures and a cafe and gift shop. The public could visit for free. As there was free admission the Lithuanian tax authorities argued the VAT incurred on its construction was irrecoverable as there was no intended economic or business activity. The European Court disagreed. It found that Sveda was a commercial company that operated a cafe and made charges for some other other supplies and was therefore in business. The fact that it had received grant funding and that the cafe income etc could never conceivably cover the costs of construction didn’t matter. The VAT on the trail construction was attributable to its intended taxable supplies and fully recoverable. For more on the Sveda case see Sveda Case
Interestingly Sveda was not concerned with apportionment.The VAT incurred on the project was apparently either recoverable or not. The questions it raises include whether the fact the VAT was incurred by a commercial company was relevant – had a Charity built the trail would the decision have been different? If not where is the boundary drawn. Is a parish church in business and able to recover all the VAT on repairs to its medieval structure just because it offers a guide book and postcards to the visitor ?
The Durham Cathedral appeal concerned VAT recovery, not on constructing a path, but repairing a bridge that allows access to the high peninsula on which the Cathedral stands along with the Castle and lots of other buildings. The Cathedral was not arguing for 100% recovery but that they should be able to include the VAT in the category of expenditure that was treated as being partly for their business purposes. Since 1995 Cathedrals have been able to make use of a special banding scheme to determine their business/non business position and under this Durham could treat 65% of mixed use VAT as business. HMRC disagreed, arguing that the bridge was too far away from the Cathedral for the VAT to be said to be directly linked to the Cathedrals business activities of shop, cafe etc.
The Court felt it only needed to consider Sveda and that HMRC were clearly wrong. The VAT was partly recoverable.
I am not sure that this case really helps much with understanding the scope of the Sveda judgement. It was concerned with apportionment for one thing – the Cathedral didn’t attempt to argue for full recovery. They would also I suspect have succeeded without Sveda as cases such as Folkestone Harbour Board have dealt with not dissimilar points. The reported HMRC argument that the bridge was just too far away was also rather weak – it was at the bottom of the hill on which the Cathedral stands and was clearly an access route.
The Sveda argument that would have been interesting is whether the whole basis of the Cathedral banding scheme is in fact now wrong. The Cathedral treats its VAT as 65% business which implies its a band B Cathedral – one that has free entry but sizeable visitor numbers, charges for certain areas and retail and catering income. Does Sveda provide a precedent for arguing that, in such circumstances, either the VAT is 100% business or at least justify a higher business % than 65% ? I personally think there’s mileage in this argument.
For what its worth, I don’t think the business/non business cathedral banding scheme was designed to deal with expenditure such as this. Having sat through various Cathedral appeals in my policy past my recollection is that it was designed to determine recovery for works to the physical fabric of a Cathedral building ‘and associated buildings within its curtilage’ rather than the wider estate.
Clearly HMRC were wrong to argue that the repairs to the bridge had no link to the business activities of the Cathedral as it formed an important access route and many of the people using the bridge will spend money in the Cathedral. But, assuming an apportionment is required, I am not convinced that 65% of the use of the bridge relates to business. Although – what isn’t clear to me from the decision is whether the Cathedral owns and rents out other property in the area served by the bridge; if it does then perhaps a higher % can be more easily justified. But on the facts as given, applying the 65% business apportionment used to determine recovery for the Cathedral building itself seems questionable. But the HMRC position that there was no business use of the bridge at all is even more absurd.
If it was correct that the Cathedral banding system had to be used and the decision for the Court was therefore how the repair VAT should be treated within this method then the decision is clearly correct – it was used in part for a business purpose and 65% was recoverable. Well done to the Cathedral for winning.
This of course assumes that an apportionment was the correct approach and that following Sveda 100% recovery was not allowable. Although its a shame that the Court didn’t consider this, one can see why. The amounts directly at stake were small – £6,720 and this is before the business/non business and partial exemption apportionment is applied – although I assume that the Cathedral’s intention was to try and set a precedent for other similar expenditure incurred in the area. It’s also not really the ideal type of expenditure to test the wider Sveda point.
Quite why HMRC took the case is another question – how they thought they had a 50% plus chance of winning, as required under their litigation policy, is beyond me. Why they didn’t use Counsel for the first case to consider a point that is potentially worth millions is also surprising.
I doubt HMRC will appeal the case. Its worth a read though. You may not end up much the wiser about the scope of Sveda but it references Trollope, Medieval Church structure, the Venerable Bede, Pagan Mythology and the view from a train on the the East Coast mainline.
The decision can be found here:http://www.bailii.org/cgi-bin/format.cgi?doc=/uk/cases/UKFTT/TC/2016/TC05477.html&query=(durham)+AND+(cathedral)