Revenue and Customs Brief 45/07
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Issued 14 June 2007
VAT: Partial Exemption – VAT deduction by theatres on production costs
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 ( 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Brief 12/06, which is now withdrawn.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..
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
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
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
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
Value of programme sales plus value of box office sales
||Input tax incurred on production services
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.
About the Author
© Crown Copyright 2007.
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updated regularly and may be out of date at time of reading.
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Article Published/Sorted/Amended on Scopulus 2007-06-14 20:52:43 in Tax Articles