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Animal Magic applied to VAT

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Imagine the following day out, with children: a trip to the zoo, giving access to various animals in pens, a toilet block, a café cum shop situated either near the entrance or at the furthest extremity of the zoo, and a picnic/play park area. The café sells pizza slices, tea, coffee, fizzy drinks and bakewell tart. The merchandise includes named mugs and cuddly zebras and chimps. You view the toilet and café as a necessity, as otherwise the children will be unbearable and you will be desperate for a cup of tea.

Alternatively, imagine visiting Chester Zoo. You and the children are to stay more than four hours. You are making a day of it. There is a huge selection of animals to see, several varied and sophisticated cafés, and some boutiques with enticing themed merchandise. The café near the big cats serves tiger steaks. Near the giraffes, a café serves giraffe-leaf salad. The armadillos’ neighbouring café serves armadillo-shaped pies. The whole thing is integrated, and the cafés are part of the experience – of the memories – and the learning process, and contribute to the overall enjoyment. The merchandise sales are similarly specific to the animal related experience.

Are these alternatives different for VAT? Well, following the decision in North of England Zoological Society v HMRC [2015] UKFTT 287 (TC) of the First-tier Tribunal, the answer may be in the VAT recovery position. Put simply, HMRC tried to limit VAT recovery on animal costs by saying that the only income to which these costs attributed value were admissions (exempt) and charges for animal encounter experiences (taxable). HMRC denied any link with the (significant taxable) café and merchandise turnover. It said that these were merely coincidental supplies, which visitors did not need to buy in order to enjoy the animals. This engaged the famous ‘but for’ test, which says that you cannot attribute a cost to a supply merely on the basis that the supply would not have happened but for the activity supported by that cost. The link has to be closer than that.

Chester Zoo, though, with boa-constrictor tenacity, argued that you could not analyse the holistic visitor experience like that. It was a complete day out, and all elements, and thus all costs, contributed to it. The animal costs gave a platform for all income generation. Thus, the café and merchandise turnover was more directly linked to the animals, rather than merely being a coincidental by-product. That seems sensible, and different to the situation with the café/shop of my first example, which is provided for convenience/necessity and no more.

I wonder, though, about the attribution of the specific café costs. After all, where cafés are so integral to the entire visitor experience, surely these costs are equally attributable to the entire business, and not solely attributable to taxable supplies. But this provocative and extreme postulation is irrelevant, because that point never arose.

So, we now have a key decision which gives HMRC a dilemma. Should it appeal on the basis that the distinction is specious, or act the ostrich and argue that the decision applies only to the facts of Chester Zoo? To determine that choice, HMRC needs to consider the potential reaction of the entire exempt cultural sector. What if theatres and museums take this up, and add their bar and shop turnover into the mix when apportioning input tax on production costs? HMRC would then, I think, point out that the Court of Appeal (a far superior court to the FTT) said, in Mayflower Theatre [2007] EWCA Civ 116, that the merchandise sales, even when themed to go with the specific show, did not create a sufficient link with the production costs, and the appellant in that case did not even attempt to argue a link with bar sales. So HMRC holds some powerful cards to distinguish this recent zoo case from any other cultural venue.

But I feel that the zoo has the lion’s share of the arguments. Bear in mind that a theatre bar trade is usually accepted by HMRC as being ‘ancillary to primary purpose trade’ (which is theatrical performance) and thus not subject to direct tax where a charity theatre is involved. This is of course a different test, but it seems to say something about the holistic ‘day/evening out’ argument which lends support to this recent decision. After all, feeding time for the penguins is not much different to feeding time for the children. 

Issue: 1270
Categories: In brief , VAT