Independent VAT Consultant
Share this content

Partial victory for opera house in partial exemption case

1st Jul 2019
Independent VAT Consultant
Share this content
Opera singer performs on stage

The Royal Opera House faced a VAT bill of £532,069 for overclaiming input tax on production costs. This is a remake of similar partial exemption disputes going back to 1995. But is it now time for HMRC to change its tune?

The crux of the case of Royal Opera House Covent Garden Foundation (TC07157) was whether the costs of producing shows at this world-class venue had a direct link to the following sources of income:

  • Catering income
  • Ice cream sales
  • Shop sales (merchandise etc)
  • Venue hire for private parties and other events
  • Production work carried out for other companies eg set design, costumes etc.

The direct link with the production costs (artist and conductor fees, sets, props and costumes etc) was important for the calculation of input tax recovery and partial exemption.

Trading background

As the Royal Opera House is a charity, the income from ticket sales to shows is exempt from VAT. However, programme sales and sponsorship income are taxable, so the costs of productions are partly claimed as residual input tax using the standard method based on the ratio of taxable to taxable and exempt sales.

HMRC ruled that input tax needed to be adjusted by applying the standard method override (VAT Notice 706) to remove certain sources of taxable income from the calculations that results in an unfair amount of input tax being claimed. Those are the sources of income I listed above.

This was the subject of the appeal, with input tax of £532,069 at stake for five VAT periods between August 2011 and 2012.


The taxpayer claimed that there was a direct link between these sources of income and the production costs on the basis that the profits they generated enabled the charity to “enhance the artistic product.” In other words, a high-quality production will mean increased bar and catering sales because more people will attend the performances.

HMRC’s view was that the income flows were used to ‘subsidise’ the shows but were not ‘cost components’ of the show.


The appeal was partly successful: the judge decided that there was a sufficient link between the production costs and the catering and ice cream sales, but not the other sources of income.

Judge John Brooks said: “The purpose of the production costs ... is not solely for the productions of opera and ballet at the Opera House but also to enable the ROH to maintain its catering income.”

He added: “The Production Costs are essential for the ROH to make its catering supplies.” The shop sales, for example, were considered to be too remote from the shows for there to be a link to the production costs, especially as a lot of sales were made online.

Revised thinking?

The tax world never stands still. There was a well-publicised case on the same issue 12 years ago involving Mayflower Theatre Trust (CA [2006] EWCA Civ 116) and catering income, an argument that was won by HMRC on that occasion.

But that approach was challenged in the 2015 case of North of England Zoological Society (TC04479) which ruled that input tax on the care and feeding of the animals at Chester Zoo had a link to catering income from on-site kiosks.

Learning points

The key principle decided in the Royal Opera House case is that the better the production, the more theatre-goers it will attract and the more they will spend on catering, enabling further top-quality productions to be arranged. This is known as a ‘virtuous circle’

It will be interesting to see if HMRC appeals the decision: as they say in the opera world, it isn’t over until the fat lady sings.

There is a view in the VAT world that HMRC’s rigid view on the need for there to be a ‘direct and immediate link’ between an expense and a taxable source of income source in order to claim input tax is out-of-date and it has been superseded by more flexible thinking by the courts.

HMRC’s approach dates back to the landmark ECJ case of BLP Group Plc (C-4/94) heard back in 1995. That is a generation ago now: perhaps it is time for HMRC to rethink its policy?

Replies (0)

Please login or register to join the discussion.

There are currently no replies, be the first to post a reply.