Independent VAT Consultant
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VAT: Song and dance over ice-cream

In a partial exemption win for HMRC, the UT overturned the FTT decision in a case involving the Royal Opera House where ice cream and catering sales were not linked to production costs.

28th May 2020
Independent VAT Consultant
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Ice cream

The upper tribunal (UT) has agreed with HMRC that input tax on production costs linked to shows, performer fees, costume costs, conductor and actor costs, did not have any “direct and immediate link” to the catering sales made from various outlets inside the Royal Opera House Covent Garden (UKUT0132).

This ruling reduced the input tax that could be claimed by the partly exempt charity on production costs, because it reduced the percentage of taxable supplies compared to total supplies for the partial exemption method it used. The UT decision requires catering supplies to be excluded from the figures.

Different thinking in courts

VAT cases can be won and lost by the finest of margins, consider the difference in the upper and first tier tribunal (FTT) in this case.

First tier tribunal

I discussed this ruling last year in my article: Partial victory for opera house in partial exemption. The judge agreed that better quality productions led to increased food, drink and ice cream sales because of higher audience numbers. It was therefore reasonable to allocate some of the input tax on the production costs to the catering supplies. The phrase ‘virtuous circle’ was used in the FTT’s report.

UT and HMRC view

Input tax on the production costs only has a direct link to ticket sales, which are exempt from VAT under the cultural legislation – Group 13, Sch 9, VATA 1994. There was a “commercial link” and “indirect link” between the catering sales and production costs but this was not sufficient to justify increased input tax recovery for partial exemption purposes.

Sveda case

A key issue is that the upper and lower courts interpreted a landmark CJEU case from a number of years ago in different ways.

In the Sveda case (C-126/14), input tax was claimed by the taxpayer on the construction of a path in a public park, which was close to the premises where it ran a catering outlet. Sveda paid for the path, supported by a grant, and claimed 100% input tax because it increased its taxable catering income.

The company won its appeal in the CJEU, overturning an assessment raised by the domestic tax authorities to deny input tax. The CJEU agreed that there was a “direct and immediate link” between the path and the catering sales.

That was different with the Royal Opera House case where the UT felt that the only direct link with production costs was to the ticket sales. To quote from the UT report: “The production costs are not used to make supplies of champagne at the bars of the ROH.”   

Logical approach 

If you think about the Sveda case, the Royal Opera House decision becomes more logical: Sveda paid a lot of money for a new path because they knew that this would increase the sales from their catering outlet. The Royal Opera House pays for better quality productions because this will increase ticket sales to performances. A welcome spin-off from the increased ticket sales is better revenue for the catering outlets, but it is only a sideshow.  


HMRC will be pleased with this decision because it gives added strength to a strict interpretation of the ‘direct and immediate link’ test.

The decision also supports the approach of looking at the concept of ‘cost components’ in a supply. In the UT's report, the judge said: “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”.

We cannot be complacent when dealing with this topic, and more tribunal cases are likely.

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