The Upper Tribunal (UT) has agreed with HMRC that production costs incurred by the Royal Opera House Covent Garden Foundation (ROH) do not have a direct and immediate link to the catering income generated from its bars and restaurants. The effect of the decision is to reduce the amount of VAT that ROH can deduct. However, the case has wider implications for other cultural organisations that have exempt admission income, and all partly-exempt businesses grappling with the deduction of VAT on costs.

Background

In the past, HMRC took the view that VAT incurred on theatrical production costs was directly attributable to ticket sales only, and where these were exempt there was no entitlement to VAT deduction. This policy changed following challenges by Mayflower Theatre and Garsington Opera, and HMRC issued business brief 62/09, confirming that such costs were partly recoverable, where they were partly attributable to production-related taxable supplies.