Link between costs of producing shows and catering and ice cream sales

The Royal Opera House was a charity so the income from ticket sales to shows was exempt from VAT. However programme sales and sponsorship income were taxable. As a result the costs of productions such as artist and conductor fees sets props and costumes were classed as residual input tax for partial exemption purposes – a part claim was allowed using the standard method based on the ratio of taxable to taxable and exempt sales.

However HMRC said that the taxpayer should adjust the input tax claim by applying the standard method override to remove specified sources of taxable income from the calculations that resulted in an unfair amount of input tax being claimed. These were the income sources related to catering and shop sales venue hire ice cream sales and income from doing work for other production companies.

The taxpayer appealed...