BAA this week won its VAT case at The First Tier Tribunal on the recovery of VAT it incurred in relation to an acquisition transaction. HM Revenue & Customs sought to block the recovery of VAT on professional fees and the company appealed on the basis that....

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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 (TC00045). 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 [2007] STC 880, 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

Where:

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.
 
 

Issuing Department
HM Revenue and Customs
Issue Date
21 August 2009

Abstract
HMRC announce following the ruling in Revenue and Customs Commissioners v The Rank Group that they maintain their view of the law on the applicability of VAT to Mechanised Cash Bingo par fees is correct and they have sought leave to appeal the High Court decision. HMRC will raise protective assessments for bingo duty due in case it is finally determined that VAT is not due on any bingo par fees.

This Revenue & Customs Brief sets out HM Revenue & Customs' (HMRC) policy on bingo duty as a result of the Rank [2009] All ER (D) 65 (Jun) ruling, and it also reminds operators of their legal obligations for accounting for bingo duty.

Background
The High Court ruled in the case of Rank that their Mechanised Cash Bingo (MCB) par fees were exempt from Value Added Tax because the way the UK had applied VAT to MCB par fees had resulted in a breach of fiscal neutrality.
HMRC has sought leave to appeal against the High Court ruling but until and if HMRC succeed in the appeal, the Rank High Court ruling has effect across all taxpayers in the same situation.
HMRC is now considering claims for VAT output tax wrongly accounted for by bingo operators on MCB participation fees. A Revenue & Customs Brief was issued, number 40/09 which explains the action HMRC is taking.

Revenue & Customs Brief 40/09
The Brief also explained that HMRC was considering the impact of the High Court Ruling on bingo duty.

Bingo duty implications
1. Bingo duty is calculated on bingo receipts (after any VAT due has been deducted) minus winnings. The High Court has ruled that MCB receipts are exempt from VAT. If VAT has been deducted from MCB receipts when calculating the amount of bingo duty due on returns already submitted then bingo duty has been underdeclared on those returns.
2. All businesses making bingo duty returns are required to include any underdeclarations of bingo duty made on previous returns (box 7 of the return, form BD510 refers). Following the High Court decision in Rank, HMRC requires businesses to make adjustments for any underdeclarations of bingo duty for returns in respect of prescribed accounting periods from September 2006 onwards if they have not already done so. If you have not already adjusted an earlier return then these adjustments should be made on your September 2009 bingo duty return.
Where HMRC has already assessed for the underdeclared duty, businesses need not make these adjustments. (Please see the explanatory notes to the return).
3. Subsequent bingo duty returns submitted will be scrutinised by HMRC for any additional duty included within box 7 of the return and returns received will be risk assessed. Returns may be selected for additional checks to be made. Some visits to businesses to check their accounting records may be made in conjunction with other work to check claims for repayments of VAT as a result of the Rank High Court Ruling.
4. If you fail to make the required adjustments and do not account for any underdeclaration, HMRC will assess for the bingo duty due. In addition, a failure to adjust your September 2009 bingo duty return may leave you liable to penalties.
5. HMRC maintains that its view of the law is correct and that MCB takings remain liable to VAT. However, both businesses and HMRC will need to protect their positions during the ongoing litigation. Businesses which make adjustments for bingo duty as required at Paragraph 2 above may wish to make claims to recover these amounts and appeal their subsequent refusal in the event that the current ruling is reversed in a higher court.
6. HMRC does not accept that the High Court ruling extends beyond MCB to encompass par fees charged on all bingo. However in order to protect our position we will raise protective assessments for bingo duty due in case it is finally determined that VAT is not due on any bingo par fees. Payment of these protective assessments will not be enforced until and unless the final legal position justifies such action.
Published Date
21/08/2009

The Court of Appeal has referred questions to the ECJ concerning the application of the abuse of rights principle to a VAT deferral scheme involving leasing arrangements: HMRC v Weald Leasing Ltd (Court of Appeal, 14 May 2009).  The questions referred seek guidance on whether deferral of VAT using a leasing structure involving an intermediate third partyis contrary to the purposes of the Sixth Directive and the relevance of references to "normal commercial operations" to the determination of that question. (As yet, there is no judgment, just the questions referred.)  The eventual decision of the ECJ should add useful jurisprudence to the growing body of law on the application of the abuse of rights principle to VAT situations.

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This case concerned the issue of whether the ‘Lennartz’ principle of upfront recovery could be applied to capital goods where there is mixed use. The AG’s Opinion in the case created some interest due to unofficial translations casting doubt on its application in such circumstances. However, the ECJ judgment has largely ignored the AG, finding that input tax incurred in making both taxable and non-taxable business supplies cannot be recovered in full. The Court made a clear distinction between this and Lennartz type cases where the mix is business and non-business (i.e., private use).

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