HM Revenue and Customs Brief 65/09
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Issued 14 October 2009
correction of error in Revenue &
Customs Brief 62/09
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 Tribunal decision in Garsington Opera Limited. Further information
on partial exemption can be found in Public Notice 706.
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.
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
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
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 ( 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
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
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 = A ÷ (A + B) × C
on production costs
incurred in the tax year
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.
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Article Published/Sorted/Amended on Scopulus 2009-10-16 13:08:03 in Tax Articles