In Royal Opera House Covent Garden Foundation v HMRC [2021] EWCA Civ 910, the Court of Appeal (CA) upheld the Upper Tribunal's (UT) decision that there was no direct and immediate link between Opera production costs and the sale of food and drink that would allow the input VAT on the former to be deductible.

  • The Royal Opera House Covent Garden Foundation 'ROH' made a claim to recover VAT input tax of £532,069 on staging productions in 2011-12.
  • Whilst admission to the opera or ballet is an exempt VAT supply of ‘cultural services’, the ROH makes a number of standard-rated supplies and it sought to reclaim Input VAT incurred on its stage production on the basis that there is a direct and immediate link between the stage and its other economic activities.
  • On its Appeal to the First Tier Tribunal (FTT), the FTT decided that catering services were economically linked to the opera's production costs. They were part of the full visitor experience. The productions brought in the customers and the customers then purchased food and drink.
  • HMRC appealed that decision on the basis that the FTT had erred in law in respect of the Direct attribution tests.
  • The UT upheld HMRC's appeal on the basis that there were two separate supplies, which operated in parallel, to which the production costs were linked.
    • The production costs were directly and immediately linked to the performances for which tickets were sold.
    • Whilst there was an indirect link economically between the production costs and the catering supplies, it was not enough to be direct and immediate. 
    • The parties agreed that a "but for" test of causation was not sufficient to establish the link. The UT further held that expressing this test in economic terms was not sufficient to create a direct and immediate link.

The Royal Opera House appealed the UT's decision and the CA held that:

  • The FTT had been wrong to re-interpret the test of a direct and immediate link between the expenditure and the taxable activity, as one of economic necessity.
  • Instead, it agreed with the reasoning of the UT and found that there was no direct and immediate link between production costs and catering supplies.
  • The CA expressed an opinion that HMRC's alternative analysis of the facts held 'great force' although it was not considered in any detail due to the UT's reasoning being sufficient.
    • HMRC contended that the performances could be viewed as promotional activities for the catering supplies.
    • This would then create a chain of transactions. As the performances were chargeable services, this prevented the cost from being recoverable as the chain between the costs and the catering supplies was severed by the performances.
    • The judge mused that were the performances to be provided free of charge, there would be no economic activity in the performance, allowing a direct link to be established with the catering supplies and meaning the costs could be recoverable.

Useful links on this topic

Royal Opera House Covent Garden Foundation v HMRC [2019] TC7157  
In the Royal Opera House Covent Garden Foundation v HMRC [2019] TC7157 the FTT made a helpful analysis as to when taxable supplies can be directly associated with production costs for the purposes of partial exemption allocation of residual input tax. 

HMRC v Royal Opera House Covent Garden Foundation [2020] UKUT 0132  
In HMRC v Royal Opera House Covent Garden Foundation [2020] UKUT 0132 (TCC), the Upper Tribunal (UT) rejected a claim for the input VAT attribution of opera production costs to the taxable supply of catering and ice cream to visitors. 

Partial exemption and input VAT 
How do you calculate the amount of input tax you can recover under the VAT partial exemption rules? What are the de minimis rules?

How to appeal an HMRC decision (VAT)
Disagree with a HMRC decision? How to appeal, what type of decision can you appeal, what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

External link

Royal Opera House Covent Gaden Foundation v HMRC [2021] EWCA Civ 910

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