Royal Opera House Case : Implications for Charity VAT Recovery
HMRC have won the Royal Opera House (ROH) case in the Court of Appeal. The case concerned VAT recovery. The case examined whether VAT incurred on production costs was in part attributable to the taxable bar and catering supplies made in the Covent Garden building. This would allow the ROH to obtain a greater VAT recovery since its ticket sales, to which the production costs did clearly relate, were VAT exempt.
The ROH’s argument was essentially that audience members saw a visit to the ROH as an integrated experience where they watched an opera and had dinner or a drink during the numerous intervals. In view of this, it was reasonable that the production costs be recovered with reference, in part, to all of the supplies they enabled in the ROH. In contrast, HMRC argued that the production VAT did not have a sufficiently direct and immediate link to the catering and bar sales. The fact that ‘but for’ the productions there would have been no catering sales was not enough.
In their initial appeal, the VAT Tribunal agreed with the ROH. But the Upper Tribunal and now the Court of Appeal have agreed with HMRC. It would seem unlikely that there will be a further appeal.
Similar issues had come before the Court of Appeal in the 2006 Mayflower Theatre case. This was also concerned with whether production costs had a sufficient link with bar and catering sales to allow these to be considered when determining VAT recovery. The Court found not. The question in the case of the ROH was whether there had been a sufficient change in case law since to mean a similar question should be differently decided now
One of the cases that implied there might have been a sufficient change was a European Court case called Sveda. This concerned a free grant-funded heritage trail. Here, although free public access to the trail was a non-business activity, its company building provided catering facilities for trail walkers, which the Court found allowed it to recover the VAT it incurred on construction. Surely this was analogous to the position with the ROH.
The Court of Appeal found not. Sveda, and the other recent cases, were concerned with how you recover VAT when you have provided a free benefit accompanied by taxable charges elsewhere. In the case of the ROH, you had an exempt activity accompanied by other taxable charges, and here the case law was unchanged – there had to be a direct link. Not a ‘but for’ link.
Interestingly in the very last paragraph the Judge comments that had the ROH provided free admission to the opera and charged for the catering, then all of the VAT would potentially be attributable to these taxable sales and recoverable. This is actually good news, as HMRC often equate free admission with non-business and seeks to restrict VAT recovery in such instances.
If HMRC react to the ROH case by insisting that whenever there are exempt ticket sales this must always mean that production cost VAT will be mainly irrecoverable you would get some rather odd results. Let us consider a local town arts festival. It has a tent with a stage and a bar. During the day it puts on events for free and funds them by income from the bar and catering concessions. In this sense it is acting rather like a local pub that puts on free live music.. The implication here from the ROH judgment is that the VAT incurred on production costs for such events will be potentially recoverable as the only supplies it can relate to are taxable.
In the evening, the festival might attract rather more attendees than the tent can hold, and to restrict numbers it charges a £1 fee for pre booked tickets. Assuming this admission is VAT exempt, does this mean that the VAT incurred on possibly identical events suddenly changes from being wholly recoverable to irrecoverable? Although you must purchase an exempt ticket to see the show, clearly the production costs are still primarily incurred to make taxable supplies of drink and catering. It must remain arguable.
The festival is also likely to have a few headline acts where the business model is quite different, and it charges a high admission fee. Here the bar and catering income will be a secondary income stream, albeit an essential one. In this case, there are greater similarities with the ROH.
I suspect this judgment will harden HMRC’s position on similar VAT recovery questions. Since the original Mayflower judgment, there have been a number of judgments concerned with sectors such as zoos and golf clubs where the Courts accepted arguments of a similar type to those rejected in ROH. We can expect renewed HMRC challenges in these areas. But just as Mayflower didn’t stop argument over partial exemption attribution, neither will ROH. It is too fact sensitive.
But it’s not all bad news as the final paragraph of the judgement , with its statement that the production VAT might have been recoverable if the opera was free, might well prove helpful in arguments when HMRC seek a non-business VAT recovery restriction whenever something is done for free.