The Upper Tribunal recently found for HMRC in their case against The Royal Opera House Covent Garden Foundation (ROH) – case reference UKUT 0132. The ROH’s tickets to see productions are VAT exempt and therefore Input VAT would not normally be recoverable on the cost of productions. The Upper Tribunal specifically considered whether there was a direct and immediate link between the cost of productions and restaurant, bar and ice cream sales (catering supplies) that would have enable the partial recovery of VAT incurred on the cost of productions.
The case decided that the cost of productions did not have the direct and immediate link to the catering supplies required to enable Input VAT recovery; that they were not a cost component of the catering supplies. Instead the Upper Tribunal found that there was only an indirect link because the catering supplies would not have been made but for the fact that the customers were at the venue to attend performances. This indirect link by itself was not deemed sufficient to enable recovery of VAT incurred on the productions costs.
*UPDATE*: The Court of Appeal has since dismissed an appeal by the charity against the Upper Tribunal decision. The full judgment can be read here.
The Upper Tribunal’s finding here has strong similarities to the 2007 case of Mayflower Theatre Trust decided at the Court of Appeal which established there was a direct and immediate link between production costs and programme sales because the programmes relied on the productions for content. In that case Carnwath LJ observed that the Trust was right not to argue there was such a link for sales of confectionery and drinks because they had an indirect and not immediate link to the cost of productions.
The ROH case also follows the line of reasoning in a case concerning the University of Cambridge and VAT on investment management costs that was subject to a reference to the CJEU (C-316/18) and which explained whether or not there was a “direct and immediate” link between costs and sales depended on whether the costs were incorporated in the cost of the sales. HMRC’s argument that the investment management costs related only to non-business investment activity, and were not components of any business activities, won the day.
This compares with the CJEU case of Sveda UAB (C-126/14) where the court considered whether input VAT could be recovered on the cost of a recreational path that had to be open free of charge and which also enabled customers to reach a shop. The Court found that the free use of the path did not detract from the fact there was a direct and immediate link between the cost of the path and the future sales of the shop; the path brought customers to the shop enabling sales to be made and so economically was a cost component of the sales..
Likewise, in the case of Frank A Smart, the Supreme Court confirmed the findings of four tribunals and courts that tradeable VAT taxable farm subsidies were not as HMRC contended a form of investment income (and so not eligible for Input VAT recovery), but finance raised for the future economic activities of the business as a whole. There was the necessary link between the expenditure and its future VAT taxable supplies.
The key with all these three cases is there needs to be clear evidence that a cost is incurred with the intention of benefiting future economic activities in order to enable Input VAT recovery. Looking at this objectively, the ROH does not stage productions with the intention of benefiting catering supplies. They are instead a by product of the productions taking place. The ROH’s circumstances are different to those in Sveda and Frank A Smart where the costs concerned were incurred with the intention of benefiting their economic activities.
The ROH case came to court as a result of a dispute surrounding their VAT partial exemption method and the extent to which production costs related to VAT taxable activities beyond the VAT exempt performances. It should be remembered that the case does not mean production costs can never be VAT partially recoverable – the direct and immediate link to programme sales remains. It might be there are other sources of income where a direct and immediate link to the production costs can be established in which case partial recovery of VAT incurred on production costs remains possible.
Bill Lewis is a Consultant at Bates Wells and a member of CTG’s VAT Expert Group