30 June 2021 
Andrea Marshall, Tax Specialist
Update as at 30/6/21
The Court of Appeal decision in the Royal Opera House case has been released. The CofA has ruled in favour of HMRC, concluding that there is no direct and immediate link between VAT incurred on production costs and catering and bar income.
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Update as at 6/5/21 - HMRC's VAT Appeals update issued today states that "Royal Opera House appeal to the CoA heard 9 to 10 February 2021." - so decision awaited.
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The Upper Tribunal has overturned the First Tier Tribunal (FTT) decision in the HMRC v Royal Opera House Covent Garden case.
This decision considers the "direct and immediate" link between a cost and a supply in some detail. It calls on a variety of cases that have considered this issue. If you are considering whether VAT on purchases can be treated as an "overhead", and a proportion of it reclaimed, or whether it is directly linked to a taxable or exempt supply, this case is certainly worth reading.
The Royal Opera House (ROH) had successfully argued in the FTT that costs associated with its opera and ballet productions (such as set design, costumes, etc) could be treated as "overheads" and a proportion of the VAT incurred on these costs reclaimed. This was on the basis that there was a clear link to taxable income (including catering, bar and ice cream sales).
HMRC was given permission to appeal to the Upper Tribunal and the full judgment (link here) was released on 22 April 2020.
The Upper Tribunal has allowed HMRC’s appeal, concluding that that the FTT erred in law and that there was an insufficient link between the production costs and the taxable supplies made. Therefore, there was no justification for a proportion of VAT recovery.
