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Partial exemption in the cultural sector – a win against HMRC.

In the case of Royal Opera House (ROH) the First Tier Tribunal has held that ROH’s production costs have a direct and immediate link with its bar and catering income as well as the shows. 

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HMRC’s long-standing position, set out in a Business Brief in 2009 and in its guidance to staff, is that the deduction of VAT on production costs in theatres operating the cultural exemption should be subject to a partial exemption standard method override (SMO) calculation, under which any taxable/exempt ratio calculation based on turnover should not include taxable bar and catering income, on the basis that production costs do not have a direct and immediate link to such income. HMRC do accept that show related merchandise sales and touring income can be included.  They take a similar view with zoos and galleries where admission is also exempt. 

Taking support from the successful FTT appeal of Chester Zoo in a similar dispute about recovery of costs related to the zoo’s animal costs, the ROH argued that producing high quality artistic productions and performances enabled it to generate more income from commercial sources, which was then used in turn to support and enhance the artistic product; in other words the activities were linked by a ‘virtuous circle’ taking the activities of ROH as a whole. HMRC sought to argue that the exempt admission broke the link between the costs and the taxable catering income.

The FTT considered the economic reality of the arrangements and commented: ‘Taking an economically realistic view the performances at the Opera House, and therefore the Production Costs, are essential for the ROH to make its catering supplies. It therefore follows that the purpose of the Production Costs, objectively ascertained, 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.

The decision presents an opportunity for all VAT exempt cultural bodies such as charitable/non-profit making museums, galleries, theatres and zoos, to consider their current VAT recovery calculations, and where appropriate to submit retrospective claims to HMRC, subject to the 4-year cap.

Please contact our VAT Partner Socrates Socratous for more information in the first instance.

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