Royal Opera House’s claim
ROH submitted a retrospective claim for under-recovered VAT on production costs on the basis that its catering and bar income should be included in the partial exemption calculation, because the correct test was to consider the business activities of the organisation as a whole, and the ‘economic use’ of the costs. This was based on the Chester Zoo FTT case, where the zoo had successfully argued that its catering income should be included in the partial exemption calculation, which HMRC didn’t appeal.
ROH argued that the staging of its operas increased the sale of bar and catering income by attracting customers, and this income in turn ultimately funded part of the cost of productions. ROH were suggesting that the production costs were incurred to attract customers to both types of supply – the exempt ticket sales and the taxable bar/catering services, which together formed “a fully integrated visitor experience”. ROH therefore argued that there was a direct and immediate link between production costs and bar and catering income, and thus this income could be used in calculations to determine the percentage of VAT recovery. This was accepted by the First Tier Tribunal (FTT), but HMRC then appealed to the Upper Tribunal (UT) which confirmed HMRC’s view. The UT concluded that the production costs only had a direct and immediate link with the exempt supply of tickets (and other production-related taxable supplies), not the catering and bar income. The production costs were not ‘cost components’ of the catering supplies. ROH were given leave to appeal to the Court of Appeal.