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HMRC have published their revised policy on input tax recovery on the costs of staging shows for which the theatre’s admissions are VAT exempt in Revenue & Customs Brief 62/09. It follows the tribunal decision in Garsington Opera Ltd.
Garsington Opera incurred input tax on the costs on its own ‘in-house’ operatic performances. HMRC maintained that the input tax was irrecoverable because the costs were directly and immediately linked only to exempt admissions.
Garsington argued that the input tax was partly deductible (residual) because the costs were linked not only to exempt admissions, but also to taxable supplies, e.g. corporate sponsorship, touring, and programmes.
The tribunal found for Garsington. HMRC have not appealed, but have instead revised their policy.
HMRC say that production costs will always be directly and immediately linked to exempt admissions to the show. They only become residual if there is a firm intention to make taxable as well as exempt supplies when the costs are incurred. For full details, see RCB 62/09.
Independent VAT consultant, Neil Warren, said: ‘The key challenge with input tax deduction is to identify a direct link between the cost in question and the subsequent revenue that is generated. If some of that revenue is taxable and some exempt, then the input tax can be partly reclaimed as residual input tax.
'An indirect link such as concluding that the theatre production costs lead to increased taxable bar revenues is not enough.
'The positive point is that tribunals have been consistent on this topic. The conclusions in this case closely mirror those reached in the Skipton Building Society case a few weeks ago.’
