Input tax on opera production costs cannot be attributed to venue catering supplies
The Upper Tribunal (UT) has ruled that there was no direct and immediate link between opera production costs and taxable supplies of catering made in the opera venue. Input tax incurred on the production costs could not therefore be attributed to the taxable supplies for VAT recovery purposes.
The taxpayer operated an opera theatre and made VAT exempt supplies of theatre ticket sales, as well as making other supplies within the venue. These included the sale of ice creams and drinks at the venue's bars. The taxpayer had sought to recover a proportion of input tax on its opera production costs on the basis that the cost could be attributed in part to the taxable supplies of catering in the venue. The First-Tier Tribunal had previously ruled that the production costs could be attributed to these taxable supplies, so some of the input VAT could be recovered.
HMRC appealed, arguing that the production costs could only be indirectly linked to the taxable catering supplies. As such, the input VAT should not be recoverable under the application of the standard method override.
The UT ruled in favour of HMRC. As the production costs did not represent a cost component of the supplies of ice cream and drinks in the venue, there is no direct and immediate link between the production costs and the taxable catering supplies. It was not sufficient that the catering supplies would not have been made in the absence of the opera production; this was found to be an indirect link only. HMRC was therefore correct to deny the input tax deduction in respect of the production costs.
While this case is important in that it emphasises the difficulties that businesses with both taxable and exempt income have with attributing input tax.
Although the case relates to the not-for-profit sector, it is potentially relevant for any partially-exempt business.
HMRC v Royal Opera House Covent Garden Foundation  UKUT 132 (TCC)
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice before making decisions. HMRC Tax Year 2022/23.
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This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.