Royal Opera House Covent Garden Foundation
| Jurisdiction | UK Non-devolved |
| Judgment Date | 24 May 2019 |
| Neutral Citation | [2019] UKFTT 329 (TC) |
| Date | 24 May 2019 |
| Court | First-tier Tribunal (Tax Chamber) |
[2019] UKFTT 329 (TC)
Judge John Brooks
Peter Mantle, counsel, instructed by Crowe UK LLP, appeared for the appellant
Matthew Donmall counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Partial exemption – Standard method override – Production costs accepted as residual – Whether production costs have a direct and immediate link to catering and other taxable supplies – Whether break in chain or separate supplies – Appeal allowed in part.
The FTT considered whether “production costs”, e.g staging, costumes, licences etc, incurred to put on a ballet or opera at the Royal Opera House (ROH) had a direct link to catering and other taxable supplies. It was agreed that the costs are residual but the standard method override applied and required input tax to be apportioned based upon use. A direct link with catering income and ice cream sales was established.
The ROH puts on opera and ballet productions, the costs needed to do so, (e.g staging, costumes, licences etc) are termed “production costs”. ROH is partially exempt, its ticket sales are exempt from VAT (as the ROH is a charity which qualifies for the cultural exemption) and it has many other income streams both taxable and exempt.
It was accepted that the production costs were residual VAT but the amount of VAT incurred triggered the standard method override which means that input tax must be apportioned on the basis of use. The dispute between ROH and HMRC concerned whether there was a direct and immediate link between the production costs and (para. 4):
| (a) Catering income (bars and restaurants) | [the FTT found that there was]; |
| (b) Shop income | [the FTT found that there was not]; |
| (c) Commercial venue hire | [the FTT found that there was not] |
| (d) Production work for other companies | [the FTT found that there was not]; and |
| (e) Ice cream sales | [the FTT found that there was]. |
The FTT reviewed case law on the issues to be applied in reaching its decision. The principle that there must be a “direct and immediate link” between a taxable output and an expense in order that the VAT incurred on that expense may be recovered (wholly or partially) derives from the BLP Group plc v C & E Commrs (Case C-4/94) [1995] BVC 159). Since 1995 this test has been refined by the courts, a commercial link or a “but for” link is insufficient (see Mayflower Theatre Trust [2007] BVC 190).
The ECJ case of Sveda (C-126/14) [2015] BVC 36 and 2018 Cambridge University case at the Court of Appeal ([2018] BVC 16) applied the “direct and immediate link” test. As the FTT expressed it (para. 77) these cases stressed the need to “consider all circumstances surrounding the transaction concerned and take account only of the transactions which are objectively linked to the ROH's taxable activity. The existence of such a link must be assessed in the light of the objective content of the transaction in question”.
The FTT concluded that there was a direct and immediate link between production costs and catering income and ice cream sales. The ROH demonstrated a link between the performances and the sales, e.g ice cream was only available to ticket holders at performances, catering arrangements were timed to coincide with performances. As expressed at para 84, the connection was “more than a “but for” link. Taking an economically realistic point of view the performances at the Opera House, and therefore the production costs, are essential for ROH to make its catering supplies”.
The other supplies did not have a direct and immediate link to the production costs. The shop sales (which were made to ticket holders and non-ticket holders) had a “but for” link to the production costs. The venue hire only had a direct link to production costs in rare cases, e.g if a sponsor of a production wished to run a related event, other venue hire (e.g use for the Wimbledon Champions Diner) was not linked to a performance. Income from production work for other companies, although obviously generated due to the ROH's reputation for putting on ballet and opera productions, also had a “but for” link to production costs.
The FTT's decision includes a review of how the concept of the “direct and immediate link” has evolved since the BLP decision in 1995 and should be required reading for anyone with an interest in the subject. The decision also demonstrates the importance of understanding how a business operates when making decisions regarding partial exemption. The ROH provided the FTT with clear evidence concerning the way its various income streams were generated and this will obviously have assisted it in coming to the conclusion it did.
[1] The Royal Opera House Covent Garden (the “Opera House”), home of The Royal Opera, The Royal Ballet and The Orchestra of the Royal Opera House, is one of the world's pre-eminent opera houses producing internationally acclaimed opera and ballet. On 15 December 2017 HM Revenue and Customs (“HMRC”) denied a claim by the Royal Opera House Covent Garden Foundation (the “ROH”) to recover VAT input tax of £532,069 associated with the cost of staging productions at the Opera House between 1 June 2011 and 31 August 2012 (the “Production Costs”). HMRC upheld that decision on 26 April 2017, following a review. This is the appeal of the ROH against that decision.
[2] Although admission to the opera or ballet is an exempt supply for VAT purposes (see Group 13 of Schedule 9 to the Value Added Tax Act 1994 – cultural services etc) it is common ground that the ROH also makes a number of taxable supplies (eg programme sales and production specific commercial sponsorship) to which the Production Costs have a direct and immediate link. It is also accepted that because of the link to both exempt and taxable supplies the input tax associated with the Production Costs is residual.
[3] Having initially contended otherwise, at the commencement of the hearing, the ROH accepted that there was not a direct and immediate link between the Production Costs and third party commercial income, Opus Arte sale of non-ROH titles (while maintaining its argument in respect of ROH titles), licensing income and services recharges. Additionally, although supplies of backstage tours of the Opera House had also been in issue, following the evidence of the ROH Director of Finance and member of is Executive Team, Ms Mindy Kilby, HMRC accepted that there was a direct and immediate link between backstage tours and the Production Costs. It is not therefore necessary to consider these supplies further.
[4] The issue between the parties is whether there is a direct and immediate link between the Production Costs and the following taxable supplies (the “Disputed Supplies”) made by the ROH:
- Catering income (bars and restaurants);
- Shop income;
- Commercial venue hire;
- Production work for other companies; and
- Ice cream sales.
[5] Mr Peter Mantle appeared for the ROH. HMRC were represented by Mr Matthew Donmall. I am grateful to both for their clear and helpful submissions, both written and oral, although in reaching my conclusions it has not been necessary to refer to every argument they advanced or all of the evidence to which I was taken.
[6] I was provided with a bundle of documents which included correspondence between the parties, the Memorandum and Articles of Association of the ROH and HMRC visit reports. In addition, as I have already mentioned, I heard from the Director of Finance at ROH and member of its Executive Team, Ms Mindy Kilby, much of whose evidence was not challenged. Also, as it was not disputed, the witness statement of Mr David Gaskell of HMRC was admitted into evidence.
[7] However, before turning to the facts, on which there was little if any material dispute, it is first convenient to set out the applicable legislative provisions and how these have been considered and interpreted.
[8] Article 1 of the Principal VAT Directive (“PVD”), EU Directive 2006/112/EC, insofar as material provides:
… On each transaction, VAT, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of VAT borne directly by the various cost components.
[9] Article 168 PVD provides the right to deduct:
In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay:
- the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person …
[10] Article 173(1) PVD sets out the principle of attribution:
In the case of goods or services used by a taxable person both for transactions in respect of which VAT is deductible pursuant to articles 168, 169 and 170, and for transactions in respect of which VAT is not deductible, only such proportion of the VAT as is attributable to the former transactions shall be deductible.
The deductible proportion shall be determined, in accordance with articles 174 and 175, for all the transactions carried out by the taxable person.
[11] Articles 174 and 175 PVD, which deal with apportionment of input tax where supplies are used by a taxable person for both its taxable supplies and its exempt supplies are implemented in domestic law by ss 24–26 of the Value Added Tax Act 1994 (“VATA”).
[12] Section 24(1) VATA provides that:
… “input tax”, in relation to a taxable person, means the following tax, that is to say–
- VAT on the supply to him of any goods or services;
…
being (in each case) goods or services used or to be used for the purpose of any business carried on or to be...
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