A NOTE FROM CHAPTER CONCERNING VAT
The calculation for the Cathedral’s liability for VAT, and the extent to which an element of
that VAT may be reclaimed from her Majesty’s Revenue and Customs (HMRC), is extremely
complex because different elements of the Cathedral’s life attract different rates of VAT;
furthermore, the Mappa Mundi Exhibition enjoys a cultural exemption. Therefore, although
the Cathedral can reclaim some of the VAT paid a complicated equation – known as
apportionment – must be undertaken.
In the middle of 2012, the Cathedral’s auditors (Baker Tilly UK Audit LLP) recommended a
review of our procedures for calculating VAT. Given the complexity of the calculation, and
because HMRC had not conducted an inspection for at least 7 years, Chapter agreed that the
arrival of a new Cathedral Administrator provided an appropriate opportunity to conduct
such a ‘health check’. During that review, it became apparent that the apportionment
calculation had been incorrectly applied for a significant period and that the Cathedral would
be required to pay back to HMRC money which had been reclaimed erroneously, albeit in
good faith. Following prolonged discussions with HMRC, a final figure to be repaid has been
agreed and, thanks to the assistance of the cathedral’s tax advisers (Baker Tilly Tax and
Accounting Ltd), this figure is substantially lower (50%) than we originally feared. Using
unrestricted investment funds, Chapter has been able to settle HMRC’s account in full and a
clear, unambiguous baseline for future VAT reclaims has been set. Chapter undertook to
investigate how this situation arose and to examine whether there are lessons to be learned
for the future and asked the Cathedral’s Finance Committee to explore the background in
detail.
The Committee has concluded that no fault for this situation can be laid at any one person or
organization’s door. Faced with categorical assurances from the Cathedral’s finance staff
that earlier advice from HMRC and the Cathedral’s auditors was being followed, there was
no reason for the auditors to check in detail whether the apportionment calculation was
being applied correctly. Consequently, pursuing a claim against the auditors would not be
justified. Moreover, intervening enquiries from HMRC over the level of the Cathedral’s VAT
reclaim had been answered to HMRC’s satisfaction by the Cathedral’s finance staff. The staff
therefore had no indication that a fundamental error in calculations had been made, and
compounded, over a number of years. In addition, in recent years HMRC’s own
interpretation of its VAT regulations has undergone radical change since 2004; indeed, it has
been a challenge for specialists to keep abreast of HMRC’s differing interpretations. The
Finance Committee therefore concluded that fault could not properly be attached to
previous, or current, staff in the Finance Department.
It is important to understand that the Cathedral has lost no money in this story: rather, it
has, for a long period of time, enjoyed the benefit of funds to which it was not, legally,
entitled. Nevertheless, there are clearly lessons to be learned from this experience. A review
of the Cathedral’s VAT liabilities has established a clearer understanding of the best way to
proceed and produced a simpler, but fair, calculation to be followed in the years ahead. Clear
instruction will be given to the Cathedral’s auditors that this area is to be the subject of
specific enquiry in the next audit period. In addition, and independently of this VAT
difficulty, the Finance Committee has recommended that it is good practice to invite
additional firms to tender for appointment as the Cathedral’s auditors. After a number of
years with Baker Tilly UK Audit LLP, invitations to tender have therefore also been issued to
a number of other local firms.
Chapter are grateful for the excellent advice provided by Baker Tilly Tax and Accounting Ltd,
the HMRC VAT specialists and the Cathedral’s Finance Committee. Any enquiries should be
directed to Administrator & Chapter Clerk on 01432 374201.