Indirect Tax Update for week ending 30 November 2016

1. © 2016 Grant Thornton UK LLP. All rights reserved.
ITU
Summary
The higher courts have not
issued any major indirect tax
judgments this week so we look
at three First-tier Tax Tribunal
(FTT) cases.
The first involves Durham
Cathedral and the question to
resolve was whether VAT
incurred on maintaining a bridge
could be reclaimed by the
Cathedral. HMRC considered
that there was an insufficient link
between the bridge and the
Cathedral's economic activities
and refused the claim. The
Tribunal disagreed.
The second case involves the
teaching of English as a foreign
language (TEFL) and whether
the taxpayer was an eligible body
such that its services qualified for
VAT exemption.
The final case relates to a 'failure
to register' case where the
Tribunal ruled that the effective
date of registration was much
later than HMRC asserted.
02 December 2016
Durham Cathedral v HMRC
Durham Cathedral is an historic building principally used for worship purposes. It is
built on a peninsular and is surrounded by the river Wear. There are a number of
bridges over the river which allow access to the Cathedral and it is in relation to the
expenditure incurred on maintaining one of those bridges (the Prebend's bridge) that
was the main issue in this case.
In addition to its religious activities (which for VAT purposes are treated as non-
business activities that are outside the scope of VAT), the Cathedral also has some
taxable income (sales from a gift shop and café). The Cathedral argued that, following
the Court of Justice judgment in the case of Sveda (case C-126/14), it was entitled to
reclaim a proportion of the input VAT it had incurred on the maintenance costs.
HMRC refused the claim. It argued that the location of the bridge was, in fact, too
remote from the Cathedral itself for there to be any real link between the costs of the
repairs and the taxable activities of the Cathedral.
Having considered the evidence and the judgment of the Court of Justice in Sveda, the
Tribunal decided that the costs of maintaining the bridge were an overhead of the
Cathedral. As such, the question was then whether there was a sufficient link between
the bridge and the general activities of the Cathedral. On the evidence, the Tribunal
found that there was and allowed the Cathedral's appeal. The fact that not everyone
who used the bridge would also visit the Cathedral's café and shop was irrelevant. The
fact remained that the activities of the Cathedral when looked at as a whole included
business activities (the café and shop) and non-business activities (religious activities).
As such, the costs of maintaining the bridge must have a link with the overall activities.
Accordingly, the Tribunal allowed the Cathedral's appeal. To the extent that the costs
were incurred for the purposes of the Cathedral's taxable activities (calculated by
reference to the Cathedral's business/non-business and partial exemption formulae),
input VAT incurred could be reclaimed.
Comment – this is the first case brought to the UK Tribunal which relies on the
judgment of the Court of Justice in the Sveda case. It confirms that distance is
not necessarily the measure of whether there is a link between expenditure and
outputs. Here the bridge was some distance from the Cathedral but the
Tribunal was not concerned. What mattered was whether the costs of
maintaining the bridge were overhead costs and, once that was established,
input VAT could be reclaimed to the extent that the costs related to taxable
activities.
Issue36/2016
A bridge too far?
Indirect Tax Update

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GRT100456
OISE Ltd
Teaching of English as a Foreign Language (TEFL)
The taxpayer in this case was a company limited by guarantee which provided various services
including teacher training and (TEFL). The question to resolve was whether the company was an
eligible body for VAT purposes such that its services qualified for exemption from VAT. It argued
that it was an eligible body because it was a non-profit making body. Alternatively, it was an eligible
body on the basis that, what it provided was TEFL (a body supplying TEFL services being an
eligible body even if it is profit making).
On the first point, the Tribunal found that, on the evidence, despite the philanthropic intentions of
the main shareholder of the wider group, the fact remained that there was no legal restriction on the
company's ability to distribute its profits.
On the TEFL point, HMRC's view was that the company provided teacher training services rather
than TEFL. In other words, what the company supplied was the methodology of teaching the
English language not the language itself. There were over 30 courses provided by the company and
the Tribunal examined each of them. In the majority of cases, the Tribunal found that there was a
single supply of teacher training (methodology) and that any TEFL was ancillary to that main element
of the supply. Consequently, the taxpayer's appeal was partially allowed, but substantially dismissed.
Comment
The main question in
this case was whether
teaching the teachers
was, of itself, the
teaching of English as a
foreign language. The
Tribunal heard
evidence that the
method of teaching
teachers by its nature
involved the teaching
of the language.
Unfortunately for the
taxpayer, the Tribunal
considered that the
teaching element
predominated in most
of the courses.
Omid Khazaei
Comment
The case demonstrates
the methods that
HMRC will use to
determine an effective
date of registration in
situations where the
taxpayer has retained
no business records.
Interestingly, HMRC
argued that Mr Khazaei
was not entitled to
appeal against any
assessments until he
had submitted
outstanding VAT
returns. The Tribunal
had to point out to
HMRC that the law on
this point had actually
been repealed in 2009.
Failure to register for VAT
The taxpayer in this case acquired a pizza and kebab shop that was not registered for VAT at the
time of acquisition but had been at an earlier point in time. Mr Khazaei did not register for VAT.
However, having conducted an investigation into the taxpayer's affairs, HMRC considered that Mr
Khazaei should have registered with effect from 1 January 2004.
This date was calculated by HMRC from information from various sources, not least self-invigilation
records, (where the taxpayer is requested by HMRC to keep accurate takings records over a set
period) and invigilation conducted by HMRC officers.
The taxpayer argued that HMRC's calculation of his turnover – and thus the effective date of VAT
registration - was wrong on a number of counts. Firstly, the taxpayer argued that as the invigilation
took place during the World Cup, the takings were much higher than normal because of the 'World
Cup Fever gripping Blackpool' and the seasonal nature of the business. The Tribunal dismissed both
suggestions but considered that HMRC's calculation of the effective date of registration was
incorrect. On the evidence, the Tribunal concluded that Mr Khazaei should have been registered with
effect from 1 January 2009 rather than, as HMRC had calculated, 1 January 2004.
Contact
Stuart Brodie Scotland stuart.brodie@uk.gt.com (0)14 1223 0683
Karen Robb London & South East karen.robb@uk.gt.com (0)20 772 82556
Vinny
McCullagh
London & South East Vinny.mccullagh@uk.gt.co
m
(0)20 7383 5100