Royal Opera House Covent Garden Foundation v Revenue and Customs Commissioners
| Jurisdiction | England & Wales |
| Neutral Citation | [2021] EWCA Civ 910 |
| Court | Court of Appeal (Civil Division) |
[2021] EWCA Civ 910
Lord Justice David Richards, Lady Rose of Colmworth and Lord Justice Dingemans
Court of Appeal (Criminal Division)
Value added tax – Partial exemption – Whether costs of staging productions have a direct and immediate link to taxable supplies of catering and ice creams – No – Principal VAT Directive , art. 1, 168 & 173 – VATA 1994, s. 24, 25 and 26.
The Court of Appeal unanimously dismissed an appeal against the UT's decision that there was no direct and immediate link between the costs of staging productions and taxable supplies of catering etc. In a win for HMRC, the production costs were found to be directly and immediately linked to VAT exempt ticket sales and the VAT incurred on them was therefore irrecoverable.
Royal Opera House Foundation (“ROH”) is partially exempt. The income streams which are relevant to this case are income from ticket sales (which is exempt from VAT because ROH is a charity which benefits from the cultural services exemption) and catering sales (which is taxable). ROH considered that VAT incurred on the costs of staging productions should not be wholly attributed to VAT exempt ticket sales. It considered that this VAT was residual because it had a direct and immediate link to both ticket sales and catering supplies. ROH argued that it provided a “fully integrated visitor experience” and that the quality of its catering supplies could be distinguished from those available at a West End theatre “where there might be a cramped bar or just ice creams available, the facilities of the Opera House were a key element for anyone attending a performance” (para. 7).
However, the Court of Appeal agreed with the UT ([2020] BVC 531). Although the ROH demonstrated a “but for” link between the production costs and catering supplies (because catering would not be supplied if there were no performance to which tickets were sold), the Court agreed with HMRC that this was a test of “commercial necessity” which did not grapple with the “need for the link to be direct and immediate” (para. 87).
The Court of Appeal concluded that the UT had decided the case correctly and for the correct reasons (para. 88). At para. 108 of its decision the UT stated “The Production Costs are not used in order to make supplies of champagne at the bars of the ROH … In no sense could it be said that the Production Costs are part of the costs of supplying the champagne and thus a direct and immediate link is precluded. Whilst accepting that the making of the exempt supplies in this case is promotional of the Catering Supplies and assists in giving the visitor to the ROH “fully integrated visitor experience”, that is not sufficient in itself to enable conclusion to be reached that the Production Costs are a cost component of the Catering Supplies.”
ROH relied heavily upon “Sveda” UAB v Valstybinė mokesčių inspekcija prie Lietuvos Respublikos finansų ministerijos (Case C-126/14) [2015] BVC 36. In that case a Lithuanian taxpayer constructed a recreational path which visitors could access free of charge. The taxpayer claimed a refund of VAT incurred on construction on the grounds that this expenditure was directly and immediately linked to taxable supplies such as accommodation, food, drink and leisure activities which it provided to people using the path. The Court pointed out that this case could be distinguished from that of ROH because it concerned a non-economic activity rather than the making of VAT exempt supplies. At para. 89 the court stated “…, the provision of the path was, viewed in isolation, a non-economic activity and so could be disregarded, with the result that there was for VAT purposes a direct and immediate link between the taxable supplies and the chain of supply was not severed.”
Although disappointing for the Royal Opera House, the Court of Appeal has provided a clear and succinct decision which sets out the distinction between a “but for” and a “direct and immediate” link between input tax and supplies. The decision should be read in tandem with the decision of the UT ([2020] BVC 531) which the court approved.
Peter Mantle (instructed by Edwin Coe LLP) appeared for the appellant
Matthew Donmall (instructed by the General Counsel and Solicitor to HM Revenue and Customs) appeared for the respondents
[1] This appeal concerns the claim of the appellant, Royal Opera House Covent Garden Foundation (the ROH), to deduct the value added tax (VAT) paid by it on supplies comprising Production Costs, a term which I explain below, from the VAT chargeable on its catering supplies. The claim relates to VAT totalling £532,069 paid by the ROH between 1 June 2011 and 31 August 2012.
[2] The respondents (HMRC) refused the ROH's claim. The First-tier Tribunal (Tax Chamber) (FTT) allowed the ROH's appeal, by a decision dated 24 May 2019: see [2019] TC 07157. HMRC's appeal was allowed by the Upper Tribunal (the UT), by a decision dated 22 April 2020: see [2020] BVC 531. The ROH appeals to this court with permission granted by the UT.
[3] The primary facts were found by the FTT. Those facts were not for the most part in dispute and there has been no challenge to the FTT's findings. In a case such as the present, it is important to pay close regard to those findings. As the authorities make clear, small variations in facts can make a decisive difference to the outcome in any particular case. In WHA Ltd v R & C Commrs [2013] BVC 155, Lord Reed said at [26], “decisions about the application of the VAT system are highly dependent on the factual situations involved. A small modification of the facts can render the legal solution in one case inapplicable to another”.
[4] The FTT set out its findings relevant to this appeal in its Decision at [44] to [56] and [64].
[5] The ROH stages ballet and opera performances in its main auditorium, which has 2,204 seats. Its productions are “highly acclaimed” and they are the “central draw” or the “core” of its commercial proposition.
[6] There are extensive catering facilities, particularly as a result of extensive modernisation following the acquisition of the adjacent Floral Hall in the 1990s, providing a new dining area, a balcony restaurant and a champagne bar. In addition, there is the Amphitheatre Restaurant and Bar at the top level of the theatre, the Crush Room for dining and the Conservatory Bar at the Grand Tier level for drinks and bar snacks and a bar adjacent to the studio theatre at a lower level. The overall dining capacity is for 256–365 people. The theatre opens its doors 90 minutes before evening performances and some matinees, allowing access to the restaurants and bars before the performance. Tables are booked in advance and, after booking a ticket, customers are sent an email detailing the various catering options. Once booked, a table is made available for the entire evening until the end of the last interval (there are normally two intervals of about 25 minutes each) and most customers spread their dining over the period before the start of the performance and during the intervals. The proximity of the bar and restaurants and bars to the auditorium enables the audience to have convenient access to their seats which results in most staying within the building during intervals rather than leaving to buy drinks and snacks from nearby establishments.
[7] The unchallenged evidence described a visit to the Royal Opera House as “a fully integrated visitor experience”. Unlike a West End theatre, “where there might be a cramped bar or just ice creams available, the facilities of the Opera House were a key element for anyone attending a performance”.
[8] The ROH, as a charity, does not expect to make a profit, and the income from catering and retail sales, in addition to box office receipts and funding from Arts Council England, is required to support its artistic output. The FTT quoted the evidence of the ROH's Director of Finance:
The investment in our artistic output, including our direct production costs enables us to generate the necessary income from all sources – including box office and catering/retail. If our productions were not perceived to be of the highest artistic quality by the public, we would not be able to generate the revenues to support our business.
[9] In his submissions, Mr Mantle for the ROH described a virtuous circle, whereby the high quality of the artistic output drove demand for the catering offered by the ROH, which in turn increased the income available for spending on the artistic output. The FTT accepted this analysis.
[10] The Production Costs relevant to this appeal are those related to each production and do not include the costs of the ROH permanent staff or its fixed overhead costs. They are described by the FTT at [49]:
These include the fees for guest performers and conductors, creative teams, music costs (for music still in copyright), the cost of sets, props, costumes, transportation, extras and actors. As such, these can vary from one production to another depending on, for example, the number of performers, the size of chorus (if any) and whether it is a new production requiring an initial outlay in relation to the set, costumes and props or a revival, for which only repairs, alterations and adjustments to existing sets etc. are needed.
[11] The basic relevant principles of VAT law are well-settled and not in dispute. They derive from the EU legislation applicable to VAT, which in the present case is Council Directive 2006/112/EC, often called the Principal VAT Directive (the PVD), as interpreted by the Court of Justice of the European Union (ECJ) and by our domestic courts. Effect is given to the PVD by national legislation. As the dispute in the present case relates to VAT paid in 2011–12, the applicable law is unaffected by the...
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Hedge Fund Investment Management Ltd
...taxable supplies – see BLP at paragraphs [19] to [21]. In particular, in Royal Opera House Covent Garden Foundation v R & C Commrs [2021] BVC 12 (“ROH”), the Court of Appeal made it clear that the reference to “cost components” in article 1(2) of the Directive does not mean that the cost of......