Graham Elliott is Technical Adviser to the Charity Tax Group
We welcome the First Tier Tribunal’s decision in the case of Durham Cathedral (TC05477), which we think has wider application to charities (and to others).
The issue was whether VAT expended on the maintenance of a bridge which afforded access to the Cathedral site could be reclaimed as having a nexus with the taxable supplies of the Cathedral. HMRC refused that claim. The tribunal has reinstated it.
The claim arose following the Court of Justice (‘CJEU’) decision in the case of Sveda (C-126/14) which established that the creation of an access path to a site from which the tax payer sold taxable supplies had a sufficient link with those supplies to allow VAT recovery, despite the fact that the users of the path were not obliged to make a purchase or even to visit the retail outlet in question (since they could use the path simply for recreation). That situation was mirrored in the Cathedral’s case because the bridge was equally suitable for general recreational use as to access the Cathedral itself.
HMRC had originally directed that the expenditure on the bridge had no ‘direct and immediate link’ with the Cathedral’s taxable supplies, and thus no VAT recovery was permitted. They continued to reject the Cathedral’s claim following the Sveda decision, apparently on the basis that the bridge was too far away from the Cathedral. The tribunal held that the principles in Sveda should be applied to this case and that VAT recovery was permitted. Since Durham Cathedral is within Band B of the Cathedrals banding scheme, 35% of the Cathedral’s general use is regarded as being non-business and 65% as being for business. The Cathedral’s claim was only for the 65% (minus an element to reflect exempt supplies), and the tribunal upheld that claim and rejected HMRC’s arguments.
Certain more specific points of relevance emerge from the decision. First, HMRC did not allege, nor did the Tribunal suggest, that the charitable status of the Cathedral made any difference to the application of the Sveda precedent. The Tribunal helpfully lists points of factual difference between Sveda and Durham, but does not mention charitable status as one of them. Further, the Tribunal concluded that: ‘the expenditure on repairs to the bridge is linked to the activities of the appellant as a whole, and that … the link is an objective one not dependent on the appellant’s intentions…’ [emphasis added]. This says that the only relevant issue is an objective appraisal of the link between the expenditure and the activities it supports, and that considering any wider motive, objective, or ‘intention’ is not permitted. It therefore does not matter if a charity’s object is to maintain historic infrastructure or to facilitate religious worship, or any other such purely charitable overall remit. All that matters is the objective link between a cost and its ultimate use.
We think that this is correct, and that this is a key aspect of the Sveda decision. Since HMRC did not argue anything specifically to the contrary in what they knew was the first case to refer specifically to Sveda, and given that the case had been referred to HMRC’s partial exemption unit of expertise, we can only infer that HMRC recognises that this is the correct legal position.
It is also worth noting that the Tribunal found, as a fact, that the reason for the Cathedral having non-business activity alongside its taxable activity was because of the religious use of the site. It is logical to infer that those who use the bridge and also proceed into the Cathedral may on some occasions do so to worship, and on others to consume supplies. As there is a clear distinction between those two uses of the site, the logical conclusion was that the bridge served these two separate and distinguishable uses, and accordingly it seems sensible for the Cathedral to have apportioned the expenditure. That is the sole difference between Durham and Sveda, and there is not any implied presumption that a charity which does not have a clearly separate, distinctively non-business activity would necessarily apportion the VAT, just as Sveda did not apportion the VAT it incurred on the path.
We suggest that the matter should rest there, but shall monitor whether there is to be an appeal, and any other actions taken by HMRC or charities.