The Upper Tribunal has recently handed down its decision in HM Revenue & Customs’ (HMRC’s) appeal against the decision of the First Tier Tax Tribunal (FTT) in May 2019.
The FTT had agreed that the Royal Opera House Covent Garden Foundation (ROH) had the right to input VAT recovery on the cost of staging productions at the Royal Opera House in Covent Garden. ROH uses the standard partial exemption method and had treated production costs as overheads of its business.
The dispute surrounded HMRC exercising its powers to override the standard method on the basis that it was not fair and reasonable. The FTT addressed various issues regarding attribution and whether there was a direct and immediate link between the cost of production and various income streams of the ROH.
The FTT decided that the production cost had a direct and immediate link to programme sales, production specific sponsorship, shop sales of ROH recordings and production-related venue hire. It also found that the production costs had a direct and immediate link to catering income and ice cream sales.
HMRC appealed against the finding that the production costs had a direct and immediate link to the catering and ice cream sales.
It was settled at the FTT that shop sales other than ROH production recordings, most venue hire and other production work were not directly linked to the production costs incurred.
The Upper Tribunal concluded that the link between the production costs and the catering supplies, and ice cream sales, is no more than an indirect link and as such could not be attributed to these elements. It held that this was in line with the recent CJEU decision in University of Cambridge and the Supreme Court decision in Frank Smart.
It should be remembered that the dispute surrounded an override of the standard method. It was not disputed that production costs related to both exempt and taxable supplies of the ROH, but rather the extent to which production costs related to activities other than the performance.
There is no suggestion in the decision that production costs are not non-attributable and theatres should consider how they have treated production costs. Theatres should also consider whether HMRC could argue that the standard, or other partial exemption methods, could be overridden on the basis that it is not fair and reasonable. Generally, the difference in input tax between the standard method and another method needs to be more than £50,000 before HMRC can trigger these provisions.