The decision of the Upper Tribunal (UT) in HMRC v Royal Opera House Covent Garden Foundation [2020] UKUT 132 (TCC) will be a disappointment not just to the Royal Opera House (ROH), but the theatre industry more widely, particularly given the other problems which the sector is currently facing. However, even had the First-tier Tribunal (FTT) decision been upheld, HMRC might well have sought to confine the case to the unique circumstances of the ‘fully integrated’ operatic-cum-dining experience of a Covent Garden performance, and consequently have refused to allow theatres to attribute production costs to supplies of refreshments in their bars more generally.
Indeed, this was somewhat the approach the UT took towards the Chester Zoo case ([2015] UKFTT 287), which the FTT had considered persuasive in the circumstances. Rather than explaining precisely why the logic of that decision did not apply to ROH, the UT declined to engage with the substance, and was instead content simply to treat it as a case decided on its own facts.
It might also be felt that the UT was somewhat harsh on the FTT, overturning its decision on the grounds that it had wrongly applied a ‘but for’ test, notwithstanding that the judge had been clear that he was not doing so. Indeed, it was precisely on that basis that he had found against ROH in respect of the other taxable supplies in respect of which it had also sought to attribute its production costs.
Having taken the view that an identified economic link, where the input is commercially essential for the taxable output, was not sufficient, the UT appears to have concluded that the economic approach emphasised in many of the cases post-Mayflower Theatre Trust Ltd ([2006] EWCA Civ 116) should be limited to overheads cases, rather than those involving attribution to particular taxable supplies. However, it is not clear that the authorities necessarily require such a limitation, and certainly, in Sveda [2016] STC 44, the advocate general’s view appears to have been that an ‘objective economic link’ was sufficient in specific attribution cases (para 45).
ROH had also relied on ANL [2017] STC 843, CA, and while this was plainly an overheads case, it is not clear that Patten LJ’s comments there must be construed so as to apply solely to that context: note, in particular, his observation that ‘it makes no difference in my view in economic terms whether one treats this as a choice between non-taxable supplies and the taxable supplies of newspapers and advertising or between non-taxable supplies and ANL’s general overheads’ (para 50).
In the same case (at para 55), Patten LJ also observed that the law had moved on since BLP Group [1995] STC 424 and Carnwath LJ’s application of the cost component test in Mayflower. The UT again considered that this referred only to overheads cases. However, this would seem surprising given that Mayflower was of course a specific attribution case, so if the UT’s interpretation is correct here it is not clear what aspect of that case Patten LJ would have been seeking to cast doubt on – especially given that his comment in the preceding paragraph that ‘the purpose of the performance [in Mayflower] was in part to enable the Trust to make taxable supplies of refreshments’ follows on from the discussion of the ‘new’ objective economic purpose test in the European authorities.
Overall, then, the UT decision seems somewhat retrograde, moving away from the trend towards economic/commercial realism in other recent appellate decisions and reviving the narrow ‘cost-component’ test from BLP in respect of specific attributions. While the latter is straightforward enough to apply in a paradigm case where an input is physically incorporated in the output supplied, it is less helpful for businesses such as ROH that seek to rely on less visible forms of connection, albeit where the link is equally compelling commercially.
The decision of the Upper Tribunal (UT) in HMRC v Royal Opera House Covent Garden Foundation [2020] UKUT 132 (TCC) will be a disappointment not just to the Royal Opera House (ROH), but the theatre industry more widely, particularly given the other problems which the sector is currently facing. However, even had the First-tier Tribunal (FTT) decision been upheld, HMRC might well have sought to confine the case to the unique circumstances of the ‘fully integrated’ operatic-cum-dining experience of a Covent Garden performance, and consequently have refused to allow theatres to attribute production costs to supplies of refreshments in their bars more generally.
Indeed, this was somewhat the approach the UT took towards the Chester Zoo case ([2015] UKFTT 287), which the FTT had considered persuasive in the circumstances. Rather than explaining precisely why the logic of that decision did not apply to ROH, the UT declined to engage with the substance, and was instead content simply to treat it as a case decided on its own facts.
It might also be felt that the UT was somewhat harsh on the FTT, overturning its decision on the grounds that it had wrongly applied a ‘but for’ test, notwithstanding that the judge had been clear that he was not doing so. Indeed, it was precisely on that basis that he had found against ROH in respect of the other taxable supplies in respect of which it had also sought to attribute its production costs.
Having taken the view that an identified economic link, where the input is commercially essential for the taxable output, was not sufficient, the UT appears to have concluded that the economic approach emphasised in many of the cases post-Mayflower Theatre Trust Ltd ([2006] EWCA Civ 116) should be limited to overheads cases, rather than those involving attribution to particular taxable supplies. However, it is not clear that the authorities necessarily require such a limitation, and certainly, in Sveda [2016] STC 44, the advocate general’s view appears to have been that an ‘objective economic link’ was sufficient in specific attribution cases (para 45).
ROH had also relied on ANL [2017] STC 843, CA, and while this was plainly an overheads case, it is not clear that Patten LJ’s comments there must be construed so as to apply solely to that context: note, in particular, his observation that ‘it makes no difference in my view in economic terms whether one treats this as a choice between non-taxable supplies and the taxable supplies of newspapers and advertising or between non-taxable supplies and ANL’s general overheads’ (para 50).
In the same case (at para 55), Patten LJ also observed that the law had moved on since BLP Group [1995] STC 424 and Carnwath LJ’s application of the cost component test in Mayflower. The UT again considered that this referred only to overheads cases. However, this would seem surprising given that Mayflower was of course a specific attribution case, so if the UT’s interpretation is correct here it is not clear what aspect of that case Patten LJ would have been seeking to cast doubt on – especially given that his comment in the preceding paragraph that ‘the purpose of the performance [in Mayflower] was in part to enable the Trust to make taxable supplies of refreshments’ follows on from the discussion of the ‘new’ objective economic purpose test in the European authorities.
Overall, then, the UT decision seems somewhat retrograde, moving away from the trend towards economic/commercial realism in other recent appellate decisions and reviving the narrow ‘cost-component’ test from BLP in respect of specific attributions. While the latter is straightforward enough to apply in a paradigm case where an input is physically incorporated in the output supplied, it is less helpful for businesses such as ROH that seek to rely on less visible forms of connection, albeit where the link is equally compelling commercially.
