Theatres Case Raises Issues for VAT Recovery?

The Upper Tribunal decision in the case of HMRC v Royal Opera House Covent Garden Foundation (“ROH”) concludes that VAT on production costs cannot be attributable to, and is not a cost component of, taxable supplies of catering or ice-cream sales. The decision in this case could have wider implications for any partly exempt business.

Dated: 29 April 2020 Author: Terri Bruce, Director of  Indirect Tax for SMEs and Not for Profits

Background of this case

ROH receives exempt income from the sale of tickets for performances as well as taxable income from programme sales, sponsorship income, the sale of ice-creams and the provision of catering in bars and restaurants. 

ROH recovered a significant proportion of VAT on production costs on the basis that it considered that there was a direct link between taxable income streams and the production costs.  The rationale for this was that the better the production was, the more people would attend and the greater the income generated by the catering outlets would be.   

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 not a cost component of catering.  They therefore required ROH to apply the standard method override which resulted in a reduced level of VAT recovery.

The Upper Tribunal agreed with HMRC that the link between the production costs and the catering supplies was indirect.   The Production Costs were only cost components of the exempt supply of tickets to the performances staged by the ROH and were not cost components of the catering supplies. 

This means that VAT incurred on production costs remains largely irrecoverablewith only a proportion being attributable to programme sales rather than being treated as a general overhead cost to the business. 

Who could be Impacted?

The decision has a direct impact on theatres but may have wider ramifications for any partly exempt business or charity as it gives support to HMRC’s argument that input tax is only recoverable where it has a direct and immediate link to, or is a cost component of, taxable supplies made by a business. This is in line with the recent CJEU decision in The University of Cambridge case and the Supreme Court decision in Frank A Smart

Any businesses in similar circumstances should consider whether the decision creates potential exposure regarding current attribution of costs.

We recommend that all partly exempt businesses should consider whether existing partial exemption methods could be overridden on the basis that they are not fair and reasonable.

It is not clear whether the decision will be appealed by ROH.

Read the decision: HMRC v Royal Opera House Covent Garden Foundation ("ROH").

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