News - indirect

HMRC have revised their 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 Mayflower Theatre Trust Ltd v CRC [20067] STC 880 (see the report Update, Taxation, 17 May 2007, page 539).
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 have decided not to appeal this decision.
HMRC's new policy is that 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 but 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 programme photographs.
HMRC say that the system whereby most theatres use the partial exemption standard method to apportion residual input tax between taxable and exempt supplies works well, provided that 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. Major theatres which buy in large numbers of shows are the ones most likely to trigger the override and thus need to undertake a 'use-based' calculation for their costs. This is any calculation that fairly reflects how costs are used. HMRC say that 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 standard method override.
Theatres wishing to claim input tax which was incorrectly treated as exempt should 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 HMRC say that full details should be submitted with the claim). Theatres using the standard method must consider the standard method override 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.
HMRC Brief 45/07, 15 June 2007

Categories: News , VAT