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HMRC internal manual

VAT Partial Exemption Guidance

HM Revenue & Customs
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Guidance for specific trade sectors: Theatres and Operas: Mayflower Theatre

Revenue & Customs Brief 45/07 following the judgement by the Court of appeal in Mayflower

HMRC released the following Revenue & Customs Brief 45/07 after the judgement by the Court of Appeal in Mayflower Theatre Trust. HMRC revised the policy set out in this brief following the Tribunal decision in Garsington Opera Limited. The revised policy following Garsington can be found in Revenue & Customs Brief 65/09, found at PE78200.

HM Revenue & Customs (HMRC) has revised its policy on input tax recovery on the costs of staging shows (production costs) for which the theatre’s admissions are VAT exempt. It follows the judgment of the Court of Appeal in the case of Mayflower Theatre Trust Ltd ([2006] EWCA Civ 116) (MTT). It replaces the first article in Business Brief 12/06, which is now withdrawn. Further information on partial exemption can be found in Public Notice 706 Partial exemption.

The dispute

MTT bought in performances (production services) under contract from touring companies. The supply of production services was a single supply for VAT purposes. HMRC maintained that none of the input tax was deductible because it related solely to supplies of exempt admission. MTT argued that the input tax was partly deductible (residual) because the production costs had a direct and immediate link not only to exempt admissions, but also to taxable supplies such as catering, programme sales and corporate sponsorship.

The Court of Appeal decision

The Tribunal found for HMRC but this was overturned in the High Court. The High Court allowed residual treatment concluding that the production costs were sufficiently linked to what the court described as ‘taxable tickets’ which formed part of a single taxable supply of corporate sponsorship.

The Court of Appeal rejected the ‘taxable tickets’ argument, and a further argument that the costs were overheads of the business as a whole. However, the Court of Appeal found that the production services included the provision of raw material that was essential for the printing of taxable programmes such as logos, photographs and casting information. Accordingly, the input tax was residual. HMRC has decided not to appeal this decision.

The new HMRC policy

Theatres which receive single supplies of production services from touring companies, that include material essential for the printing of programmes, may treat the input tax as residual. This applies even where that programme material is a minor part of the contract.

Theatres that stage their own shows may receive supplies such as costumes or scenery. These supplies will not be residual. This is because the costs have a direct and immediate link with admissions and not with the printing of programmes even though costumes and scenery might be visible in subsequent programme photographs.

Impact on theatres

The vast majority of theatres use the partial exemption standard method to apportion residual input tax between taxable and exempt supplies. This works well provided VAT bearing costs are used in proportion to the value of supplies made. However, residual production services are used almost entirely for exempt admissions with only a minimal link to taxable programmes. The Court of Appeal recognised that this led to an over-recovery of input tax.

Since 18 April 2002, if the standard method results in an over (or under) recovery of input tax which is classed as ‘substantial’ then the recovery must be re-calculated in accordance with the ‘actual use’ of the costs in question. This is known as the Standard Method Override (SMO). Further information on the SMO, including the definition of ‘substantial’ can be found in the public notice.

Major theatres which buy in large numbers of shows are the ones most likely to trigger the SMO and thus need to undertake a ‘use-based’ calculation for their costs.

A ‘use-based’ calculation is any calculation that fairly reflects how costs are used. As production services only have a direct and immediate link with box office sales and programme sales, a fair calculation could be:

Recoverable input tax on production services =

Value of programme sales x Input tax incurred on production services
Value of programme sales plus value of box office sales  

Theatres operating the standard method which regularly receive production services that are residual may wish to seek approval for a special method to avoid the risk of triggering the SMO.

Claims for under-recovered input tax

Theatres may wish to claim input tax which, in the light of this HMRC Brief, was incorrectly treated as exempt. They must use the partial exemption method in place when the input tax was incurred unless there are exceptional reasons why an alternative method is needed in which case full details should be submitted with the claim. Theatres using the standard method must consider the SMO when making a claim and all claims are subject to the normal three year time limit.

Theatres that have reclaimed input tax on the basis of the High Court’s decision, but whose production costs exclude essential material for programmes, will now be subject to assessment with interest due.

Further information about making claims can be found in Public Notice 700/45 How to correct VAT errors and make adjustments or claims and in Business Briefs 25/04 and 28/04.