Sveda – Recovery of VAT on heritage park
10 June 2015
Sveda was concerned with VAT recovery and whether a free admission, grant subsidised park was in business and entitled to full VAT recovery.
Lithuanian mythology and its interaction with the EU VAT rules is a subject that I have often wondered about. Fortunately there is now a European case on the subject – Sveda; and the ECJ has now given judgment following an opinion from the Advocate General on April 22 2015.
The way that the European Court works is that for important cases a judge, called the Advocate General gives his or her view and this is then considered by the other judges that are down to decide the case. The AG opinion provides a summary of the law and the arguments. In the case of Sveda u this AG opinion took time to be published in English and was only released with the final judgment – where the Court agreed. It can be found at : AG Opinion
The case concerns a visitor park devoted to baltic mythology. It has trails for people to wander around and other features for them to enjoy. No charge is made for entry, in part it seems because the Lithuanian Government would only fund the construction if admission was free. This Government funding covered which was treated as a grant outside the scope of VAT covered 90% of the cost. The remainder of the construction cost was to be ultimatly raised from sales of souvenirs, parking and cafe income. The park website contains a plan and photos, see Sveda Park Website
The question was whether all of the VAT on the construction by Sveda was recoverable because there is a cafe and souvenir income or is there a partial restriction because the trail is free.
HMRC UK submitted an argument to the Court that there should be a restriction. This fits in with the ‘cost component’ argument that has been emerging from HMRC HQ in the last year. Under this argument an activity that was only party funded by means of charges would suffer a restriction on associated VAT recovery.
This cost component approach could have serious consequences for the charity and not for profit sector which often subsidises its activities using outside the scope income. It could impact on arts organisation VAT in particular. A number of representations have therefore been made to HMRC to not go down this route and they have retreated somewhat. But interestingly in the case of Sveda the UK’s intervention was rejected by the AG who accepted that all of the VAT on construction should be recoverable as there were taxable supplies made.
The AG did ask the national Court consider again whether the 90% subsidy provided to Sveda by the Lithuanian Government was in reality payment for supply made to the Government but if it found that there was no supply, i.e. the money was a grant outside the scope of VAT, then it agreed there should be full recovery.
In October 15 the Court gave its final judgment agreeing with the AG.
Sveda is a very important case for a number of reasons. Firstly it represents a serious, probably fatal, set back to the HMRC cost component policy. Secondly it raises interesting questions about VAT recovery for free museums and cultural centres and points to there being a difference in the treatment between museums that make no charge and those that are culturally exempt. If a museum makes no charge for admission but convinces that it intends to obtain income from visitors through shops and cafes then the implication is that it will be able to recover all of its its VAT. If however, a museum was to make an exempt supply of admission then the partial exemption rules are different and the impaction is that VAT cannot be fully recovered. This implies that some previously decided UK cases such as Whitechapel Art Gallery may have been wrongly decided.
It will be interesting to see how HMRC react to Sveda. One aspect which may become important is that the appellant was a profit making exhibition and events company so there was no doubt it was engaged in an economic activity. Does this mean it was treated differently from the way a charity would be – I suspect there will be argument here.