The Upper Tribunal supported HMRC’s argument that the Royal Opera House could not use catering supplies to produce VAT recovery on its production costs
Jan Garioch CA discusses a recent case HMRC v Royal Opera House Covent Garden Foundation which is a nostalgic read during coronavirus lockdown, providing a glorious reminder of when we were able to sit together in a packed opera house and enjoy a drink at the bar with friends.
The case for VAT recovery from the Royal Opera House
The Upper Tribunal (UT) heard an appeal by HMRC against the decision of the First Tier Tribunal (FTT) regarding input VAT recovery on Royal Opera House (ROH) production costs. These costs include the expense of sets and costumes together with the fees of guest performers. The FTT had upheld a sufficient link between production costs and catering supplies in the ROH’s bars and restaurants to permit input VAT recovery. The picture painted behind this decision was that a visit to the ROH was a fully integrated visitor experience.
The doors would open 90 minutes before the performance to allow the visitor plenty of time to enjoy its bars and restaurants. At the same time as booking the ticket, an opportunity is offered to make advance purchases of champagne and refreshments, and the ROH made considerable advance sales. If you booked to eat in the restaurant, the table was yours for the entire evening, which permitted the enviable experience of spreading your meal throughout the evening with world class opera or ballet to watch between courses.
Consequently, the FTT found that opera and ballet performances brought the bars and restaurants their clientele and hence the production costs were not solely for opera and ballet but also enabled the ROH to maintain its catering income.
The pushback from HMRC
HMRC viewed this approach as unfair. It regarded the production costs as a cost component of the performance tickets and the programmes sold, but not of the catering supplies. HMRC’s attempt to apply the standard method override triggered this dispute, and their disappointment with the FTT decision generated this appeal. They argued before the UT that the FTT erred in law by going no further than applying a ‘but for’ test, by which they meant that but for attracting customers by producing opera and ballet, the ROH would not have made its catering supplies. HMRC argued that entitlement to VAT recovery required more than establishing this economic link. A further test of whether the production costs were a cost component of the catering supplies was required.
The Upper Tribunal’s decision
The UT was persuaded that the FTT erred in law. It had misled itself in its analysis of recent ECJ cases, most particularly Sveda UAB v VMI, because it failed to see that the ECJ has never wavered from requiring a direct and immediate link between the expenses in question and specific output transactions. The UT therefore set aside the FTT decision and decided it could apply the correct test to the facts found by the FTT to remake the decision. The UT found no more than an indirect link between the production costs and the catering supplies and that failed to satisfy the direct and immediate test which is essential for input VAT recovery. Consequently, HMRC’s appeal was upheld.