Residual VAT – Direct and immediate link

The Royal Opera House Covent Garden

The Royal Opera House Covent Garden (ROH) is the home to The Royal Opera, The Royal Ballet and The Orchestra of the Royal Opera House. Whilst admission charges are exempt, the taxpayer also makes some taxable supplies. It is accepted that some of the taxable supplies, such as programme sales and production specific sponsorship, have a direct and immediate link to the production costs. This is based on the earlier Court of Appeal (CoA) decision in Mayflower. The VAT on production costs is residual. The dispute is whether there is such a link between production costs and catering income (bars and restaurants), shop income, commercial venue hire, production work for other companies and ice cream sales. Such a link would then allow these taxable income streams to be included in the residual recovery rate calculation, increasing the recovery rate applicable to the VAT on production costs.

The FTT makes some general observations in para 77. These start with statements specific to the ROH before going on to summarise case law on establishing the required link. Turning to the disputed supplies:

Catering income (bars and restaurants) – The FTT considered that, like the programmes in Mayflower, the catering in the bars and restaurants of the Opera House are separate supplies rather than links in the same production chain. Whilst noting the Mayflower CoA case, the current FTT considered that in the light of the decision of the ECJ in Sveda (C-126/14), a different approach is required. The Court noted this different approach had been adopted by Patten LJ in Associated Newspapers Ltd (ANL) [para 55] and in Cambridge University. The FTT considered the required approach is to objectively consider whether there is a "necessary economic link between the initial expenditure and the economic activities which follow". Adopting this approach, the FTT concluded that there is such a link between the production costs and taxable catering supplies in this case.

Shop income – Aside from the sale of recordings, both audio and visual, of ROH productions there is not a sufficient link to the sale of other items. The production costs have no more than a commercial and/or “but for” connection rather than a direct and immediate link.

Commercial venue hire – Other than production specific events, the FTT was unable to find that there is a direct and immediate link to the production costs.

Production work for other companies – The FTT noted that the productions at the Opera House play a significant part in the ROH receiving orders from other opera and ballet companies to construct scenery and make costumes. However, the FTT was of the view that this was a “but for” link and not sufficient to enable the FTT to find a direct and immediate link with the production costs. The FTT added this work was undertaken by the ROH at a fixed price, which includes materials and labour, and as such the production costs cannot be a cost component of these supplies.

Ice cream sales – Given the different approach now required following Sveda and ANL, the FTT considered that, as with catering, the Opera House productions, with their associated costs, are essential for the sale of ice creams as it is the productions which ensure the audience is there to buy the ice cream, and so there is the required link.

Comment

This provides a useful reminder of the direct and immediate link test. There is some confusion about the inclusion of catering supplies in Mayflower Trust. In para 40 of that decision the CoA states:

‘By dealing compendiously with all these items, the tribunal has, in my view, failed adequately to address the particular characteristics of the programme sales, as distinct from the other items, for example, sales of confectionery and drinks. Rightly in my view, the Trust has not sought in this court to claim a sufficient link between such sales and the production services.’

This suggests that had Mayflower run the argument to include catering in the calculation, the Court would have found against the taxpayer. What the current FTT is saying (paras 82 and 83) is that the test has changed following Sveda (C-126/14), ANL and Cambridge University. All of those cases however are to do with looking through non-economic activity. The fixed price approach to the production work for other companies suggests that, VWFS (C-153/17) decision by the ECJ notwithstanding, sale price may still figure in the way cost component is calculated.

The Royal Opera House Covent Garden

The Royal Opera House Covent Garden (ROH) is the home to The Royal Opera, The Royal Ballet and The Orchestra of the Royal Opera House. Whilst admission charges are exempt, the taxpayer also makes some taxable supplies. It is accepted that some of the taxable supplies, such as programme sales and production specific sponsorship, have a direct and immediate link to the production costs. This is based on the earlier Court of Appeal (CoA) decision in Mayflower. The VAT on production costs is residual. The dispute is whether there is such a link between production costs and catering income (bars and restaurants), shop income, commercial venue hire, production work for other companies and ice cream sales. Such a link would then allow these taxable income streams to be included in the residual recovery rate calculation, increasing the recovery rate applicable to the VAT on production costs.

The FTT makes some general observations in para 77. These start with statements specific to the ROH before going on to summarise case law on establishing the required link. Turning to the disputed supplies:

Catering income (bars and restaurants) – The FTT considered that, like the programmes in Mayflower, the catering in the bars and restaurants of the Opera House are separate supplies rather than links in the same production chain. Whilst noting the Mayflower CoA case, the current FTT considered that in the light of the decision of the ECJ in Sveda (C-126/14), a different approach is required. The Court noted this different approach had been adopted by Patten LJ in Associated Newspapers Ltd (ANL) [para 55] and in Cambridge University. The FTT considered the required approach is to objectively consider whether there is a "necessary economic link between the initial expenditure and the economic activities which follow". Adopting this approach, the FTT concluded that there is such a link between the production costs and taxable catering supplies in this case.

Shop income – Aside from the sale of recordings, both audio and visual, of ROH productions there is not a sufficient link to the sale of other items. The production costs have no more than a commercial and/or “but for” connection rather than a direct and immediate link.

Commercial venue hire – Other than production specific events, the FTT was unable to find that there is a direct and immediate link to the production costs.

Production work for other companies – The FTT noted that the productions at the Opera House play a significant part in the ROH receiving orders from other opera and ballet companies to construct scenery and make costumes. However, the FTT was of the view that this was a “but for” link and not sufficient to enable the FTT to find a direct and immediate link with the production costs. The FTT added this work was undertaken by the ROH at a fixed price, which includes materials and labour, and as such the production costs cannot be a cost component of these supplies.

Ice cream sales – Given the different approach now required following Sveda and ANL, the FTT considered that, as with catering, the Opera House productions, with their associated costs, are essential for the sale of ice creams as it is the productions which ensure the audience is there to buy the ice cream, and so there is the required link.

Comment

This provides a useful reminder of the direct and immediate link test. There is some confusion about the inclusion of catering supplies in Mayflower Trust. In para 40 of that decision the CoA states:

‘By dealing compendiously with all these items, the tribunal has, in my view, failed adequately to address the particular characteristics of the programme sales, as distinct from the other items, for example, sales of confectionery and drinks. Rightly in my view, the Trust has not sought in this court to claim a sufficient link between such sales and the production services.’

This suggests that had Mayflower run the argument to include catering in the calculation, the Court would have found against the taxpayer. What the current FTT is saying (paras 82 and 83) is that the test has changed following Sveda (C-126/14), ANL and Cambridge University. All of those cases however are to do with looking through non-economic activity. The fixed price approach to the production work for other companies suggests that, VWFS (C-153/17) decision by the ECJ notwithstanding, sale price may still figure in the way cost component is calculated.