The recent TV series ‘Our Zoo’ showed that Chester Zoo is no stranger to challenging officialdom. The tradition continued with a £1m VAT tribunal ruling that input tax on animal related costs was not subject to the standard rated override. Neil Warren reports.
Do the costs of feeding and treating animals at Chester Zoo have a direct link to food, drink and merchandise sales (taxable sales) earned by the zoo as well as the VAT exempt admission fees paid by the general public?
That was the question considered by the tribunal in the case of North of England Zoological Society v HMRC [2015] UKFTT 0287 (TC) which saw HMRC try to restrict the society’s input tax claim over a 10-year period by applying the standard method override calculation on costs relevant to the animals. The VAT involved was nearly £1m, mainly because of capital expenditure of £14m spent by the society in a five-year period to provide new and improved enclosures for the animals.
The income from admission fees to Chester Zoo is exempt from VAT because of the society’s charitable status and it is clear that there is a “direct and immediate link” between the animal related costs and these fees – after all, the main reason for paying to go to a zoo is to see animals.
HMRC was also happy to accept that there was a link with some taxable income, for example fees from animal-related promotions, but that it was incorrect to include all of the zoo’s taxable sales in the standard method formula (taxable income divided by taxable plus exempt income) from activities such as catering and merchandise sales. So the inspectors applied the standard method override to exclude many sources of taxable income from the standard method to reduce the input tax claimed by the society on animal costs. The standard method override calculates the amount of input tax that can be claimed on a ‘use’ basis.
The tribunal disagreed with HMRC and concluded that no override should be applied – to quote from the report (para 131): “Standing back to look at the overall picture, it seems to us that in the particular circumstances of the society’s economic activities the animal-related costs have a direct and immediate link to the catering and retail supplies. We are satisfied that economically the animal related costs are a cost component of the catering and retail supplies.”
So why did the case go in favour of the taxpayer? Relevant factors considered by the court included the fact that many of the catering outlets and shops were carefully positioned next to the animals, and also the fact that many of the items sold in the shops - for example guide books - directly related to animals. And the improvements to the animal facilities clearly increased both the quantity of visitors to the zoo and the average time they spent on the premises ie increasing the income earned from catering and retail sales at the same time.
This was a good case for the taxpayer to win because it is consistent with earlier decisions on the issue of input tax allocations and apportionments such as Mayflower Theatre Trust and Town and County Factors Ltd. It is important that any partly exempt business adopts an assertive approach to input tax allocations and thinks outside of the box about the purpose and outcome of an expense.
Many traders adopt a ‘play safe’ approach and under claim input tax, which is very dangerous when large amounts of tax are involved, for example in relation to capital expenditure.