This month’s Chartered Accountants Tax Case digest looks at an Upper Tribunal (“UT”) case where a charitable theatre sought to recover VAT on certain production costs on the basis that it considered there to be a direct link between taxable income streams and the production costs.

The case centred on the ability of HMRC to exercise its powers to override the standard method on the basis that it was not fair and reasonable.

Background

This case was an appeal from the decision of the First-tier Tribunal (“FTT”) which allowed the appeal in part of the taxpayer, the Royal Opera House Covent Garden Foundation (the “ROH”).

The appeal to the FTT was against HMRC’s denial of a claim by the ROH to recover input VAT associated with the cost of staging productions (the “Production Costs”) at The Royal Opera House Covent Garden (the “Opera House”).

The ROH receives exempt income from the sale of tickets for performances in addition to taxable income from programme sales, sponsorship income, the sale of ice-creams and the provision of catering in bars and restaurants. It recovered a significant proportion of input VAT on its production costs on the basis that it considered there to be a direct link between taxable income streams and the production costs.

The ROH argued that this was because the better the production, the more people would buy tickets and attend meaning the income generated by the catering outlets would be higher.

HMRC’s view was that this resulted in an unfair level of VAT recovery as the production costs were a cost component of the ticket (and programme) sales but they were not a cost component of catering. It therefore required ROH to apply the standard method override which resulted in a reduced level of VAT recovery.

The FTT therefore was required to consider if there was a link between certain supplies and the ROH’s production costs which would then be used to determine if input VAT on production costs could be partially recovered.

At the FTT, the supplies in question were meals and souvenirs at the theatre (before, during and after the performance) including ice cream sales, shop sales and catering in restaurants.

The FTT agreed that these supplies did create such a link and therefore that an element of the input VAT incurred on the production costs was recoverable.

Although HMRC accepted that the production cost had a direct and immediate link to programme sales, production specific sponsorship, shop sales of the ROH recordings and production-related venue hire, it appealed to the UT against the finding that the production costs had a direct and immediate link to the catering and ice cream sales.

Decision

The UT agreed with HMRC that the link between the production costs and the catering supplies was indirect. They saw these as only cost components of the exempt supply of tickets to the performances staged by the ROH and not cost components of the catering supplies.

In their decision, the Tribunal used the example of a production cost comprising a costume used for a ballet performance or when a guest opera singer sings at the opera. In both these examples, the production costs were undeniably specifically attributable to the ballet and opera performances. Both are physically used to put on the ballet and opera productions.

They stated clearly that the same cannot be said of the catering supplies. The production costs are not used in order to make supplies of champagne at the bars of the ROH. There was a link to the supplies of champagne in that without the performances the champagne would not be served but that it was only an indirect link. In no sense could it be said that the production costs are part of the costs of supplying the champagne. Thus, a direct and immediate link is precluded.

Whilst the judges accepted the argument that the catering supplies helped give a visitor to the ROH a fully integrated visitor experience, this was not sufficient in itself to enable a conclusion to be reached that the production costs are a cost component of the catering supplies.

On that basis, the UT concluded that HMRC was correct to deny the ROH’s claim to recover VAT input tax associated with the production costs.

The full judgment in this case is available from:- https://assets.publishing.service.gov.uk/media/5ea050e7e90e07048e8947d7/HMRC_v_Royal_Opera_House.pdf