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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: Garsington Opera

Revenue & Customs Brief 65/09 following the Tribunal decision in Garsington Opera

HMRC released the following Revenue & Customs Brief 65/09 after the Tribunal decision in Garsington Opera Limited.

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 Tribunal decision in Garsington Opera Limited. Further information on partial exemption can be found in Public Notice 706.

The dispute

Garsington Opera incurred input tax on the costs of putting together its own ‘in-house’ operatic performances at Garsington. HMRC maintained that the input tax was irrecoverable because whilst putting on operas was the core of Garsington’s business, the production costs were directly and immediately linked only to exempt admissions. Garsington 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 corporate sponsorship, touring (supplies of the production to an outside concert hall), programmes, CDs, intellectual property rights and the occasional supplies of production props and equipment.

The Tribunal Decision

The Tribunal found for Garsington having identified a direct and immediate link between the production costs and both the exempt admission and the taxable supplies in issue. HMRC have not appealed this decision and has instead revised its policy on when theatres supplying exempt admission can treat input tax incurred on production costs as residual.

Revised policy

It is an established principle of partial exemption that input tax is residual if the costs are ‘used or intended to be used’ to make both taxable and exempt supplies. Costs are used if they have a direct and immediate link to supplies. Production costs will always be directly and immediately linked to exempt admissions to the show. Production costs only become partly deductible (residual) if there is a firm intention to make taxable as well as exempt supplies when the costs are incurred. Production costs are not ‘overhead costs’ which are treated as residual because they relate to the organisation as a whole. Production costs only become residual if they relate to specific taxable supplies as well as exempt admissions. Examples of when production costs relate to taxable supplies include if a theatre has contracted to or intends to:

  • Secure sponsorship - the sponsorship must relate to an event or a clearly defined run of events over a clearly defined time. Putting on the shows must be a condition of the sponsorship so that production costs become cost components of the sponsorship income. The intention may be evidenced by way of clear financial commitment.
  • Tour the production - once again the intention may be evidenced by way of clear financial commitment.
  • Record the show for later sale on CD or other media.

Production costs remain residual if an intention to make taxable supplies is frustrated. For example if production costs were treated as residual because of an intention to tour the show, the costs remain residual if the intended tour is later cancelled.

The intention to make taxable supplies must be a genuine intention. The mere aspiration or hope of making a taxable supply is insufficient to secure residual status. For example supplies of intellectual property or props/equipment created in a production are not sufficient to create a direct & immediate link in the absence of a firm intention at the time the costs were incurred that these costs would be used to make these supplies after their use in the show’s run in the theatre.

Furthermore, residual status is not secured if the link to taxable supplies is indirect. For example, production costs do not become residual simply because the production is photographed for inclusion in the show programme which is a taxable supply. Likewise, the inclusion of synopses, lists of performers or performer profiles in a programme does not demonstrate that costs are directly and immediately linked to making the taxable supplies.

The Court of Appeal Decision in Mayflower

In the similar case of Mayflower Theatre Trust Ltd ([2006] EWCA Civ 116) a direct and immediate link to programme sales was found in relation to ‘bought in’ shows. This was because copyright information necessary for the programmes was obtained as part of the single supply of production services received from the touring company thus creating the direct and immediate link. If an individual actor or designer provides copyright information to a theatre/opera putting together a show ‘in house’ as part of a single supply of their services this cost will also be residual. However it will not make other costs incurred residual.

The Mayflower decision also made clear that securing general corporate sponsorship does not make production costs residual even if the sponsorship package includes the provision of seats at performances. Likewise, catering supplies which arise as a consequence of admission do not make production costs residual.

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. The standard method can work less well when significant residual costs do not relate to all of the taxable and exempt supplies made by the business.

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 and Information Sheet 04/02.

Where production costs are residual because of direct and immediate links to specific taxable supplies such as sponsorship or touring performances and those taxable supplies are small in comparison to the total taxable supplies of the theatre the SMO might be triggered and a ‘use-based’ calculation required. In the case of theatres, the total taxable supplies may include substantial amounts of catering and refreshments for which the production is not a direct cost.

A ‘use-based’ calculation is any calculation that fairly reflects how costs are used in making supplies. Calculations should be as simple as is possible whilst achieving a fair result. A fair calculation could be:

Recoverable input tax on production costs incurred in the tax year = A ÷ (A + B) × C


A = Value of supplies in the year (such as sponsorship or touring) with a direct and immediate link from the production costs of any show.

B = Value of all box office sales in the year; and

C = Residual input tax incurred on production costs in the tax year.

Theatres operating the standard method where the SMO is likely to be triggered on a regular basis may wish to seek approval for a special method.

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 time limits.

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