VAT Tribunal finds Zoo VAT is residual because of catering and merchandise .
The lower tax tribunal has made an interesting decision in a case concerning Chester Zoo in the North of England Zoological Society Appeal. See Tribunal Decision.
The case concerned whether VAT incurred on keeping the 800 animals in Chester zoo was to any extent attributable to the taxable supplies of catering and merchandise. HMRC argued that it was not and although there were some taxable supplies that the animal costs could be directly related to, that these were of minor importance when compared to the exempt admission income. Consequently by apportioning input VAT using a standard partial exemption calculation that included the catering and merchandise income the zoo was recovering more VAT than they would be allowed if they recovered according to a use based method.
Where standard method recovery is £50,000 a year greater than the recovery under a use based method then there is a mechanism called the standard method override which requires that the lower recovery be substituted. This is what HMRC were arguing – that the zoo should not recover VAT on animal costs with reference to merchandise and catering income but only with reference to the few taxable supplies they accepted could be directly linked. For example they accepted face painting was directly linked to the animal costs. This would obviously have meant that the zoo recovered far less VAT on its animal upkeep and led to a 7 figure assessment.
The question was therefore different from that considered by earlier cases such as Mayflower Theatre and The Roald Dahl Museum. In these the tribunal had to decide if the VAT on the costs in question was residual – did it relate to both taxable and exempt supplies. In this case both HMRC and the zoo agreed it was residual but differed over what supplies the VAT could be related to.
HMRC argued a similar line to the one they argued successfully in Mayflower and Dahl, that merchandise and catering sales were linked to the main activity, the viewing of animals, but that the link was indirect. It was a ‘but for’ link and this was insufficient. The Tribunal rejected this argument and found that the zoo must be looked at in the round. Almost all supplies were linked to the animals and the aim of the zoo was to ensure visitors stayed for as long as possible and spent money in a variety of ways. Commercially the animals could be said to be exploited in a order to achieve various income streams including the catering and merchandise.
HMRC said they could only accept this in the case of a ‘super zoo’ which was a fully immersive experience and the catering facilities were themselves an exhibit – like Disneyworld. Chester was not as far as HMRC were concerned sufficiently ‘all immersive’. I am not sure quite what they mean here. Presumably letting the lions run free in the cafe would satisfy the HMRC test of an immersive catering facility but there would be health and safety considerations.
I think its an excellent decision. I have always found HMRC’s policy in such cases ridiculously restrictive. In practice any visitor attraction seeks to obtain money from a variety of sources and sets its admission prices so that income is maximised. Some make a low charge (or no charge) for site admission but rely on maximising visitor voluntary spend. Others tale a different view. These decisions are made with reference to market conditions. This holistic approach really should be recognised by HMRC when deciding on such input tax apportionment questions.
Unfortunately its only a lower tribunal decision so unless HMRC appeal, and they then lose, it with will not bind them. But it shows that if you suffer from a similar restrictive HMRC view of apportionment its worth considering if you have a counter arguement.