Garsington Opera Ltd v Revenue & Customs [2009] UKFTT 77 (TC)

FTT-Tax
Garsington Opera Ltd v Revenue & Customs
[2009] UKFTT 77 (TC) · 2009-04-28
[1]TC00045 Appeal number LON/2008/0449 Value Added Tax – Input tax – Attribution of input tax – Opera Company making both exempt and taxable supplies – Company makes exempt supplies of tickets and taxable supplies of sponsorship rights, programmes, CDs etc. to public and makes taxable supplies of productions to outside concert hall – Company pays input tax when obtaining the production inputs required to make the opera productions presented as part of season – Whether input tax on production inputs deductible – Yes – Value Added Tax Regulations 1995, SI 1995/2518 reg 101(2)(b) and (d) FIRST-TIER TRIBUNAL TAX GARSINGTON OPERA LIMITED Appellant - and - THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS (Value Added Tax) Respondents TRIBUNAL: SIR STEPHEN OLIVER QC PENNY JONAS Sitting in public in London on 21 and 22 January and 9 and 23 March 2009 Roger Thomas, counsel, instructed by Lawrence Graham, solicitors, for the Appellant Eleni Mitrophanous, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents © CROWN COPYRIGHT 2009 DECISION Garsington Opera Ltd appeals against a decision of HMRC (and against a consequent assessment to tax) issued in January 2008. The disputed decision is that the VAT incurred by Garsington Opera on the production costs of its operatic performances (the "production inputs") cannot be recovered as input tax because those production inputs are attributable exclusively to Garsington Opera's exempt supplies of tickets giving admission to the performances.[2]Garsington Opera is a charitable company based at Garsington Manor, Oxon. Its business activities consists primarily in the staging of operas and other musical performances. The operas are presented to the public during a summer season running each year from the middle of June until the middle of July ("the summer season"). In the course of each summer season Garsington Opera presents three new opera productions. Other musical performances, usually two to three concerts, are presented during the last week of April and the first week of May. Garsington Opera has an educational programme which is provided throughout the year.[3]Because Garsington Opera is an eligible body within Note 2 to Group 13 of Schedule 9 to the VAT Act 1994, the sale of the bulk of the tickets for the operas and concerts is exempt from VAT under item 2 of the Group:
"the supply by an eligible body of a right of admission to … a theatrical, musical or choreographic performance of a cultural nature"
. For that reason, Garsington Opera is partially exempt and the recovery of its input tax is restricted in accordance with section 26 of that Act and Regulations 99-110 Value Added Tax Regulations 1995 (SI 1995/2518). Although Garsington Opera is able to recover some of its input tax as being attributable exclusively to taxable supplies (see Regulation 101(2)(b)), a significant proportion of the supplies made to it are used in whole or in part in making exempt cultural supplies under Group 13 of Schedule 9. The dispute between the parties is whether the input tax incurred by Garsington Opera in relation to the production of the operas presented in the summer seasons, i.e. the production inputs, is exempt input tax on the ground that the goods and/or services on which it was charged are used by Garsington Opera exclusively in making exempt supplies, as HMRC would say, or are used in making both exempt and taxable supplies, as Garsington Opera says.[4]The relevant legal provisions are set out in the Appendix to this decision.[5]The period to which the assessments relate is from 1 November 2003 until 31 July 2007.[6]We heard or received evidence from:(i) Mr I Mackinnon, accountant and auditor to Garsington Opera since 1991. Since 2004 he has been a board member.(ii) Mr S Sandbach, sponsorship consultant to Garsington Opera.(iii) Mr A Whitworth-Jones, a part-time consultant to Garsington Opera since 2005, who performs the role of general director.(iv) Mr B Taylor, J P Morgan's Vice Chairman until 2007 and now a board member of Garsington Opera.[7]Mr Richard Harvey, the officer of HMRC with responsibility for the disputed decisions. The origins of Garsington Opera's business[8]Garsington Opera's business started in 1991. The initiative came from Mr Leonard Ingrams and his wife Mrs Rosalind Ingrams. Garsington Manor was owned by Leonard Ingrams and Rosalind Ingrams until Leonard Ingrams' death in 2005. Since then it has been solely owned by Rosalind Ingrams. Garsington Manor has been made available by them to Garsington Opera for the purpose of providing the performances during the spring and during the summer season. The lead up to the summer season[9]The planning of each summer season starts three years in advance. We take the 2006 summer season as an example.[10]The "Advisory Board" of Garsington Opera met on 13 November 2004 and identified as the three likely productions for the 2006 summer season, Mozart's "The Philosopher's Stone", Rimsky-Korsakov's "May Night" and Donizetti's "Don Pasquale". The proposals were presented to the main Board in February 2005. By July 2005 directors and conductors for each opera had been identified. A summary of Garsington Opera's plans for the three operas was then presented to the Board. The Business Plan for 2006 summer season[11]The initial budget for the 2006 summer season presented at the July 2005 Board Meeting showed a figure for income amounting to some £1,996,000. Of that, £1.07 million was set to come from "Box Office", £260,000 from "sponsorships/donations" generally and £35,000 from "productions sponsorship" (to which we will refer later). The rest of the income was budgeted to come from friends' donations, tax recovery, programme sales, catering commission and various other sources. Sponsorship[12]Why does Garsington Opera require sponsorship? Garsington Opera aspires to present fine productions. The sponsorship sales brochure issued in preparation for the 2006 summer season (see below) states that the sponsor's contribution "is a vital part in enabling us to mount the type of production for which we have become famous". Anthony Whitworth-Jones explained that sponsorship income was, and is, crucial to enable Garsington Opera to satisfy its purpose of producing three operas for the summer season each of an appropriate scale and standard. The ingredient parts of each production, such as the costumes, wigs, props and scenery have the effect of creating the visual effect demanded and enjoyed by sponsors, guests and the public. The greater the funds available, the finer the effect. The income from ticket sales (£1.07 million) accounts for roughly 65% of direct costs of the three productions. The search for a "production sponsor"[13]A letter of 12 July 2005 to J P Morgan, a financial services company, from Garsington Opera's sponsorship department draws attention to the production sponsorship opportunity for 2006 and thanks J P Morgan for its current year support.[14]J P Morgan had been a regular "production sponsor" of Garsington Opera's productions and as such had obtained the rights summarised in paragraph 15(v) below. J P Morgan's preference had been for Mozart operas produced in the traditional style. The Garsington Opera Board met on 14 July and 3 September 2005. The budget for 2006 was reviewed on each occasion. The budget figure for income from sponsorship/donations was set at £260,000. This was said to include an amount from J P Morgan. By September 2005 Garsington Opera had received an offer from J P Morgan to pay £32,000 plus VAT for production sponsorship rights for the Mozart opera to be presented in the 2006 summer season. (A VAT invoice relating to the 2005 summer season had been sent to J P Morgan in early January 2005 and we have no reason to doubt that a VAT invoice was issued in respect of J P Morgan's purchase of sponsorship rights for the 2006 summer season.) The search for other sponsors[15]Throughout the rest of 2005 Garsington Opera's sponsorship department were canvassing potential sponsors. Garsington Opera's sponsorship sales brochure was of a high quality, design and material. The "strap line" for the campaign reads - "Supporting Garsington Opera's Productions". The operas to be presented by Garsington Opera in the 2006 summer season are stated to be The Philosopher's Stone, May Night and Don Pasquale. The duration of the summer season is said to be from 10 June until 10 July 2006. We now summarise those parts of the sponsorship sales brochure that spell out the advantages, to the sponsor, of sponsorship. A general statement reads as follows:
"There can be few more pleasant ways of spending a summer's evening that bringing some guests to the opera at Garsington. While there is now a waiting list of several years for individuals wanting to subscribe, a limited number of opportunities do exist for corporates who would like to bring some guests and who are prepared to support and be associated with the opera through sponsorship. With a high proportion of sponsors returning year after year, the number of seats available in the short summer season is restricted. If you would like the chance to entertain guests to a really memorable evening, please consider the sponsorship possibilities which are listed below."
That last paragraph, we note, makes the point that the "corporate" wanting to use Garsington Opera's opera facilities to entertain business guests cannot rely on simply applying for and buying tickets for the purpose. The payment for the sponsorship ensures the right to a specified number of tickets. Rights on offer to sponsors[16]The sponsorship sales brochure for 2006 lists four levels of sponsorship on offer:(i) A sponsor who comes in as a "Supporter" pays £1,500 plus VAT. For this the sponsor gets the right to buy twelve tickets (at £115 or £125) during the course of the season with the three operas to choose from. (To exercise that right the sponsor is required to return a booking form, sent out in December of that year with a closing date in January of the next year.) The Supporter sponsor has its sponsorship acknowledged in the "souvenir programme" for the season: (the sales brochure describes the programme as "this beautifully produced programme"). The sales brochure goes on to say – "You will also be offered a reduced rate should you wish to place an advertisement in the programme".(ii) A "Benefactor" is required to pay £3,000 plus VAT in return for which Garsington Opera undertakes to sell to the Benefactor 20 tickets at the above prices for operas to be performed during the course of the season (with a maximum of twelve for any one night). Garsington Opera undertakes to list the Benefactor's sponsorship in the season's programme and to offer special rates for advertising in the programme.(iii) The "Special Benefactor" pays £6,000 plus VAT and in return Garsington Opera agrees to give to the Special Benefactor top priority booking for 36 tickets for the season. The sponsorship is to be acknowledged in the programme and Garsington Opera offers reduced rates for advertising in the programme.(iv) The Distinguished Benefactor is a sponsor who pays £7,500 plus VAT (or more) and who obtains the right to buy up to 50 tickets for the season. The sponsorship is acknowledged in the programme and Garsington Opera offers reduced rates for advertising in the programme. (iv) The Production Sponsor (who pays a negotiated price) obtains the right to buy up to 60 tickets for one performance and a further 40 for the whole season. It obtains the right to a double page advertisement in the printed programme and, at least during the lifetime of Mr Leonard Ingrams, was given a verbal acknowledgement at each performance of the sponsored opera. Sponsorship income is determined: ticket sales then follow[17]By 18 January 2006 the sponsors who had accepted the offers of sponsorship rights were known and their rights (eg to buy tickets) were determined. The amounts that they had paid or were committed to pay for their rights were known: as also were their actual ticket requirements. They had already been sent the performance schedule leaflet for the 2006 summer season and by 18 January had notified to Garsington Opera their ticket requirements. Garsington Opera then opened the box office to the general public. Garsington Opera's Business Plan for the 2006 summer season is then refined[18]The revised budget for the 2006 year shows "Production Costs" as some £1.7 million and "Income" as some £2.2 million. In this connection we make the following points:(i) The production costs relate to the actual costs of presenting each of the three operas. These include the fees for director, conductor, soloists, chorus, orchestra, electrical specialists and "technicals"; and they include specific items such as the cost of making the set and props as well as of surtitles and equipment hire. "Other" expenditure of some £477,000 in the 2006 budget includes items such as £188,000 for administration, £25,000 for rent and rates, £27,000 for press and £53,000 for fundraising.(ii) The "income" figure includes £1.15 million for tickets and £250,000 for sponsorship.(iii) Receipts from the "production sponsor", such as J P Morgan, are not "ringfenced". The cash received is available for expenses generally.(iv) For most earlier years the budgets and "actuals" showed income and expenditure relating to a Garsington Opera Mozart production presented "semi-staged" at the Barbican during the course of the Barbican's "Mostly Mozart" series. We were shown a contract dated 5 February 2005 by which the Barbican engaged Garsington Opera to perform its production of Marriage of Figaro using the director, conductor and other performers (vocal and orchestral) plus instruments and equipment for a performance at the Barbican on 15 July 2005. Barbican agreed to pay Garsington Opera £35,500 plus VAT. Garsington Opera was not engaged by the Barbican for the 2006 series. (We refer to the Barbican transactions later.)(v) £32,500 is the budgeted cost of producing printed programmes; £15,000 is the budgeted figure for advertising receipts and £44,000 for programme sales.(vi) A large proportion of the expenses incurred for each season will have carried no VAT. Many of the performers will not have been registered for VAT. Production inputs incurred in the run-up to the summer season[19]From February on and until the end of the 2006 summer season, Garsington Opera incurred the greatest part of the production inputs as well as the cost of creating the "auditorium" and other facilities required to accommodate the audiences attending the summer season's performances. The costs of scenery, props, lighting, costumes and wigs, fees for chorus and orchestra at rehearsals and performances were incurred in the period May-July of 2006. This pattern of expenditure was typical of all the years. Financial constraints on the scale of the production[20]The scale of each opera production is, as already noted, dependent on the funds available. The main budgeted sources of funds are ticket sales, payments for sponsorship rights, donations and contributions from charitable trusts, catering commission, advertising revenue and programme sales plus profit from providing the Barbican performance (if any). If the costs of any particular production appeared to be beyond Garsington Opera's means for that year then the costs of that production would be cut. Sponsorship provides an essential contribution to Garsington Opera's financial ability to present the summer season. Changes made for the 2007 summer season[21]In 2007, the system was altered so that each level of sponsorship came with the right to a fixed number of tickets as part of the package. For £1,700 plus VAT the Supporter would receive two tickets and be able to purchase ten more. For £3,400 plus VAT the Benefactor would receive four tickets and be able to buy a further 16. For £6,600 plus VAT the Special Benefactor would receive six tickets and be able to purchase a further 30 tickets. For a minimum of £8,800 plus VAT the Distinguished Benefactor would receive eight tickets and be able to purchase up to 50 tickets for one performance. Others supplies[22]In addition to the actual supplies of sponsorship, Garsington Opera made further taxable supplies relating to the opera productions during the period to which the assessment relates. It sold programmes and libretti relating to operas put on in the summer season. It sold compact discs of some of the productions. It sold advertising space within the programmes. It hired out costumes and equipment from some of the productions to other theatrical companies. It licensed various opera companies to use the "concept" of certain of the operas it staged. We will deal separately with these other supplies. General conclusions from the facts[23]The deal between Garsington Opera and each particular sponsor is founded on Garsington Opera's undertaking to present three operas during the next year's summer season as specified in the sponsorship sales brochure. The sponsor who accepts Garsington Opera's offer of sponsorship rights is obliged to pay the appropriate sponsorship fee. In return the sponsor obtains the benefit of(i) Garsington Opera's irrevocable offer to sell to the sponsor the stipulated number of tickets,(ii) Garsington Opera's undertaking to produce a high quality programme in which the sponsor's name is publicly displayed and(iii) the right to advertise in the programme and, if taken up, to do so on preferential terms.[24]It follows that from the time when Garsington Opera has contracted with the first sponsor for the forthcoming season Garsington Opera is committed to the undertakings given by it in the sponsorship sales brochure and to stage the three operas for that season. As each further sponsor contracts with Garsington Opera for sponsorship rights, Garsington Opera is bound to supply that sponsor with the sponsor's entitlement to tickets to the extent that the sponsor exercises its rights and pays the ticket price; and Garsington Opera is bound to produce a high quality season programme which acknowledges the sponsor's sponsorship and displays the sponsor's advertisement (if the sponsor chooses to place one).[25]The deal between Garsington Opera and the Barbican commits Garsington Opera to deliver a Mozart opera production, semi-staged, on the agreed date.[26]In essence, therefore, there is as inseverable a link between Garsington Opera's grant of sponsorship rights and its discharge of its obligation to provide the season of three operas as there is between Garsington Opera's actual sales of tickets (through its box office to ticket purchases generally) and the staging of the particular opera to which the ticket gives access. When Garsington Opera incurs expenditure on the production of the three operas, it is buying in the supplies required to present three sponsored productions. Were Garsington Opera to fail to provide the three sponsored productions, it would have failed to comply with its obligations to sponsors. Turning to the law[27]With those general conclusions in place we turn now to the questions of law. Was the relevant input tax, ie that incurred by Garsington Opera on the production inputs relating to the production of the three operas for the particular summer season, exempt input tax on the grounds that the goods and services on which input tax was charged were used by Garsington Opera exclusively in making exempt supplies of tickets? That is HMRC's primary contention and it is based on regulation 101(2)(c). Or were those goods and services used by Garsington Opera in making both exempt supplies of tickets and taxable supplies in the form of grants of sponsorship rights to sponsors? That is Garsington Opera's contention. It is based on regulation 101(2)(d) and is resisted by HMRC.[28]If Garsington Opera is to make good its case, it has to satisfy us that the taxable production costs related to goods and services "used or to be used by [Garsington Opera] in making both taxable and exempt supplies". HMRC, through Eleni Mitrophanous, dispute Garsington Opera's claims. To quote from HMRC's skeleton argument, "the jurisprudence of the European Court of Justice is absolutely clear on the need to consider the particular input production costs in question individually (eg the production cost of purchasing a costume) and to see whether that input is directly and immediately linked to the particular taxable transaction (eg sponsorship) in an objective way such that it can properly be said that the former is a cost component of the latter. It is the use of the particular cost incurred that is relevant, not the use of the production that is a consequence of the expenditure". In the present circumstances (say HMRC) none of the inputs were in fact used for the making of the sponsorship supply or indeed of any other taxable supplies for which a link has been claimed by Garsington Opera. HMRC acknowledge that "but for" Garsington Opera's use of the goods and services to which the input tax relates in the creation of the three opera productions it would have nothing for which sponsorship rights could be granted. But that does not, they say, establish that those goods and services were used or to be used in making the supplies of sponsorship rights. They were therefore used exclusively in making the exempt supplies of tickets.[29]Without recourse to the authorities, domestic and ECJ, our reaction to HMRC's case is that it must be wrong. The goods and services on which VAT was charged were obtained and used in the creation of the three opera productions for public performance. The grants of sponsorship rights were one means by which Garsington Opera exploited those productions for reward; other means of exploitation included the sales of tickets and the agreements to present the semi-staged performances at the Barbican. Each of those means of exploitation involved supplies by Garsington Opera. The relevant goods and services supplied to Garsington Opera, ie the production inputs, are essential ingredients in each onward supply; they are costs components of such supplies. No other use made by Garsington Opera of those supplies and no other supply of Garsington Opera has severed the connection between the production inputs and Garsington Opera's onward supplies to sponsors of their guaranteed priority rights to purchase tickets.[30]The domestic rules for deduction of input tax in the Value Added Tax Regulations are derived from Articles 17 and 19 of the EC Council Directive, 77/388 ("the Sixth Directive"). Article 17(2) gives a taxable person the right to deduct input tax "insofar as the goods and services are used for the purposes of his taxable transactions". Where the inputs are used for both taxable and exempt supplies, article 17(5) allows the deduction of "only such proportion of the value added … as is attributable to" the taxable supplies. Article 19 provides a method for calculating the proportion to be deducted, by applying a fraction of taxable turnover over all turnover. Article 17(5) permits other methods to be applied by domestic law in particular circumstances.[31]A partially exempt taxpayer will therefore be able to recover input tax on a particular supply made to him where he can show that the input in question is directly attributable to a particular taxable output or, as the legislature puts it, "used for the purposes of his taxable transactions". Where that partially exempt taxpayer makes use of the input both for his taxable and his exempt transactions (as Garsington Opera have in the present circumstances) the tax on the input falls to be apportioned. An input is, according to the ECJ jurisprudence, used for the purposes of a trader's taxable transactions if there is a "direct and immediate link between the input and the output". The test is sometimes expressed as an inquiry into whether the input is a "cost component" of the output. See BLP Group Plc v Customs and Excise Commissioners (Case C-4/94) [1995] STC 424 .[32]The issue in this appeal is how the production inputs obtained by Garsington Opera for the purposes of a particular summer season are to be attributed under regulation 101. The relevant outputs for attribution are the exempt outputs of ticket sales and the standard rated outputs of(a) grants of sponsorship rights,(b) programme sales,(c) the contract to present a semi-staged performance at the Barbican,(d) concept licensing,(e) the hiring out of costumes and equipment and (g) CD sales. The essence of HMRC's case, expressed in BLP terms, is that none of the production inputs is directly linked to any of those standard rated outputs. In particular none of those inputs considered individually (such as costs of costumes) can properly be described as a cost component of, for example, the supply of sponsorship. By contrast, say HMRC, the production inputs for the particular season's performances are directly and immediately linked to the exempt supplies of tickets: the input tax on those inputs is not therefore recoverable. We have already concluded, in paragraph 28 above, that the production inputs are cost components of Garsington Opera's onward supplies of rights to the sponsors. But supposing HMRC were right and the actual costs (if any) of granting the right to the sponsor to buy the specified number of tickets were the only cost components of those onward supplies, it would still, we think, be correct in law to conclude that the production inputs had been "used" for supplying the rights to buy the tickets. In the High Court in Mayflower Theatre Trust [2006] STC 1607 paragraph 44, Hart J, in a passage adopted by Carnwath LJ in the Court of Appeal, observed that the "direct and immediate" test laid down by the ECJ in BLP involved the quest "not for the closest link but for a sufficient link". He went on to observe that a sufficient nexus will have "existed without it being necessary to show that the inputs [in question] were a 'cost component' of the price charged for the relevant outputs in the very narrow sense of" that expression.[33]Here the inputs in question are the production inputs. The inference is, we think, irresistible that these were sufficiently linked to the relevant outputs. The evidence from Garsington Opera's budgets and management accounts which formed the basis of its board decisions demonstrates a business objective to assemble the three operas for the season in question and to meet the costs by sales of sponsorship rights and of tickets. Then, as we have already observed, Garsington Opera gives a commitment to each sponsor to stage the three operas for the season and in doing so to bear the costs of the production inputs. Every production input is obtained by Garsington Opera for the purpose of making it an ingredient in an opera production that, as a component part of a summer season, becomes the subject of exploitation by Garsington Opera in the course of its business. Another linking factor is that the sponsors obtain the first of their benefits derived from Garsington Opera's expenditure on production inputs (most of which has yet to incurred) at the point of time when they buy the right to acquire tickets for the season's productions. Those factors show that the production inputs and the grants of sponsorship rights are two inseverable parts of a single business process. The link between them is sufficient to satisfy the direct and immediate test.[34]It will then be seen that no transaction breaks the chain between Garsington Opera's receipt of the supplies of production inputs and its onward supplies of rights to purchase tickets to the sponsors. The production inputs are put together by the opera's director and others into the season's operas. The first transactions that operate as onward supplies are, as we have just observed, the grants of sponsorship rights. In the run up to the 2006 season those were completed at or shortly after the end of 2005. The sponsors then exercised their rights to buy tickets. Only after that were the unsold tickets put on sale and made the subject-matter of exempt supplies. It follows that the chains starting with the supplies to Garsington Opera of the production inputs were not broken by any exempt supplies. Nor, to use the expressions of Advocate General Saggio in paragraph 29 of his opinion in Midland Bank Plc v Customs and Excise Commissioners C-98/98 [2000] STC 501 , will any third transaction have broken the "causal chain" so as to sever the "particularly close link" of a "direct" and "immediate" nature between production input and the supply of sponsorship rights. Even if the sequence of events had been different, the unbroken causal chain between production inputs and taxable supplies of sponsorship rights would still exist because the exploitation of the season's operas through sales of sponsorship rights and sales of tickets was Garsington Opera's business objective. Why the grants of sponsorship in the present circumstances are not covered by the Mayflower Theatre decision [2007] STC 880[35]The rights granted by Garsington Opera to sponsors for payments are confined to the particular season and to the particular productions of that season. The sponsor obtains a right to buy a specific number of tickets for any of the three operas of the season; the right to be named as a sponsor relates only to the season's programme and the right to advertise on preferential terms is likewise confined to the programme for the season. In Mayflower Theatre the rights granted to sponsors were (see paragraph 23 of the Tribunal's decision in (2005) VAT Dec 19254):(i) in return for £250 to have the sponsor's name attached to a seat for a fixed period or(ii) on payment of an agreed amount for the sponsor, a business, to have advertising rights for a period of between one and three years, in the form of the sponsor's logo on the safety curtain or on a board in the theatre; alternatively the sponsor's name would be exhibited in the theatre's programme of future events. In Mayflower Theatre the Tribunal had found the link between the input (a single supply to Mayflower Theatre of a complete production) and the output of "sponsorship" (or more accurately advertising rights) as insufficiently direct to enable the input tax to be attributed to the output tax on the grant of the rights to sponsors. The Court of Appeal observed in paragraph 52 that the absence of any direct connection between the sponsorship and the bought-in productions (and in particular the fact that the duration of the sponsor's advertising rights were not fixed with reference to the duration of the production) indicated the link with the activities of the theatre as a whole rather than with the subject-matter of the production contracts. In the present circumstances, as noted, the rights granted to sponsors are production-specific and they have no reference to the more general activities of Garsington Opera, eg their educational programmes and their spring concerts. Conclusion on the main issue[36]For those reasons we have concluded that HMRC are wrong in their contention that there is an exclusive link between the input tax incurred on the opera production costs and the exempt supplies of tickets. In our view there is a direct and immediate link between the costs incurred in putting on the three productions of the particular summer season and the grants of sponsorship rights. Regulation 10(2)(d) therefore operates in the manner claimed by Garsington Opera.[37]We now turn to the other supplies made by Garsington Opera. The Barbican production[38]Garsington Opera's budgets and management accounts for 2003 onwards show an entry for income from "Barbican Concert". The 2003 budget figure was £25,690 and the actual receipt as at 8 October 2003 was £26,340. For 2004 and 2005 the income falls slightly short of the budgeted amount of £36,200. The 2006 and 2007 budget figures show no income from the Barbican. Those budgets and management accounts were regularly presented to the Garsington Board. Mr Anthony Whitworth-Jones who joined Garsington Opera as general director in 2005 could not speak of his own direct experience of the Barbican Concerts. Nonetheless we find the following facts.[39]For many years the Barbican had presented a "Mostly Mozart" series of concerts in July of each year. Two to three years in advance Barbican and Garsington Opera used to agree in principle that Garsington Opera's prospective Mozart opera would be presented "semi-staged" (ie using costumes and props but with no actual staging) for one performance at the Barbican. The contract for the 2005 performance on 15 July was signed on 5 February 2005. As and when Garsington Opera engaged its performers for that year they were told that their engagements included the further Barbican performance. The additional costs attributable to the particular Barbican performance were included in Garsington Opera's figure for budgeted and actual amounts in relation to the particular year. (There were certain production costs that had to be incurred in any event for the purposes of the summer series of Garsington; these included repetiteurs, rehearsals and language coaches; but, without the incurring of those costs, Garsington Opera would have had no operas to present either at Garsington or at the Barbican.)[40]The Barbican did not engage Garsington Opera for performances in 2006 and 2007 because the operas in the Garsington opera schedule for those years had been presented by the Barbican during recent years in its Mostly Mozart series. Nonetheless it was always part of the Garsington Opera business plan to present, if possible, one of its Mozart operas at the Barbican during or shortly after the end of the summer season.[41]The Barbican performance of Garsington Opera operas earned Garsington Opera an amount described by Mr Whitworth-Jones as an engagement fee. Allowing for the direct costs, the surplus to Garsington Opera was some 10/15% and this covered its costs of "managing" the Barbican performance.[42]We see the Barbican performance as part of Garsington Opera's business plan. The Barbican performance is, we think, a well established way of exploiting Garsington Opera's operatic products. The incurring of production inputs was essential to the onward supply of the semi-staged production under contract with the Barbican. There was, we think, a direct and immediate link between the production inputs and the supply to the Barbican such that the former can properly be described as cost components of the latter. Programmes[43]The programme covers the three opera productions of the particular summer season. The programmes are of a high quality, design and material. The contents list the sponsors and other benefactors. They contain advertisements. As well as listing the performers in and synopses of particular operas, the programmes carry pictures of previous year productions and photographs taken in the course of rehearsals of the current year productions.[44]The programme is made for sale. It serves also as the means by which Garsington Opera fulfils its commitments to sponsors to whom Garsington Opera has granted the right to have their names displayed in the programme and to be able to advertise on preferential terms. It is essential to the season.[45]The production inputs (as well as the costs of publishing and printing the particular programme) are, we think, used by Garsington Opera in making the supplies of the programmes. The production provides the essential editorial ingredients for the programme. In the words of Carnwath LJ in the Mayflower Theatre case (paragraph 43):
"To that extent, [the productions] were as much part of the raw material used in preparing the programmes, as the paper and ink from which they were physically made. That, in my view, is an objective link, sufficiently placed to satisfy the test."
[46]On that basis therefore we decide that the input tax on the production inputs falls within regulation 101(2)(d). Production concept licences[47]Garsington Opera has licensed the "concept" of operas in return for payment by another opera company. An invoice for a £5,000 fee dated 10 January 2007 issued to the Grand Theatre de Geneve is "for use of the concept of Garsington Opera's 2006 production of Don Pasquale directed by Daniel Slater". Mr Whitworth-Jones explained that such licensing was in line with Garsington Opera's policy of seeking to have its productions performed by other companies and in other venues. The Don Pasquale licence was the only one that had taken place during Mr Whitworth-Jones' tenure of office. We note however that a similar licence of a Strauss opera presented by Garsington Opera in 2004 had been granted to the Metropolitan Opera New York. The concept licences are taxable supplies.[48]Garsington Opera's contention is that the expenditure incurred by it in creating the particular production concept, being expenditure on production inputs used in making the supply of the concept, was incurred in making both taxable and exempt supplies. It should therefore be treated as residual for the purposes of the partial exemption calculation. HMRC respond by saying that there has been no evidence that the grant of the concept licence was more than the exploitation of the opportunity afforded by the staging of, for example, the Don Pasquale production. In particular, say HMRC, there has been no evidence that where the costs of the production have been incurred there was any agreement in place to make the particular concept licence supply.[49]We recognise that the concept licence agreement did not come into being until after the season and until all the costs of the production had been incurred. It would, we infer, have been surprising if the Grand Theatre de Geneve had bought the licence before seeing the production at Garsington Opera. However, the evidence shows that Garsington Opera has sought to exploit its productions by all available means, of which sponsorship, ticket sales and contracts with the Barbican are examples. The production concepts were (to adopt the words of regulation 101(2)(d)) used or to be used in making not just those supplies, but in making any other supplies, for example of concept licences, when the opportunity presented itself. The costs of those production inputs were plainly cost components in Garsington Opera's onward supplies of the concept licences relating to both operas. We are therefore satisfied that those costs must be treated as residual for the purposes of the partial exemption calculation. Equipment and props hires[50]Some items obtained by Garsington Opera for its productions were later sold or hired to other theatres and opera houses. For example, 14 lanterns were supplied in March 2007 to the English National Opera, two outfits were hired out in December 2006 to the Lyric Opera of Chicago and some replica muskets were hired to the Shakespeare Globe in June 2006. HMRC say that, because these were not obtained by Garsington Opera with a view to resale, the costs to Garsington Opera cannot be regarded as cost components of the relevant supplies. The supplies were merely opportunity sales that exploited the existence of the particular props.[51]Mr Whitworth-Jones said that Garsington Opera would always seek to exploit its props and equipment in that way. It never had advance agreements to do so but selling or leasing the equipment was always its hope. Indeed Garsington Opera encouraged opera and theatre directors to attend its performances and to have discussions to that end. We accept Garsington Opera's contention. The reality, as we have already observed, is that Garsington Opera is in the business of exploiting its productions in any appropriate manner; selling or hiring out props and equipment is one of these. We are satisfied therefore that the costs of these items are linked to both taxable and exempt supplies made by Garsington Opera. Recording and selling compact discs[52]Garsington Opera has twice recorded operas produced by it. Neither opera has been recorded before. The costs of recording have greatly exceeded the sums received on sale of the CDs. The 2006 management accounts, for example, show expenditure of £35,000 of the recording of a Tchaikowski opera. There was no budget for this. Mr Whitworth-Jones explained that recording that opera had not been part of the original plan for the 2006 season; the recording costs had been underwritten by a group of supporters. The figure for sales of CDs in 2006 was some £5,000.[53]HMRC accept that the direct costs of recording including any fees specifically relating to recording sessions are allowable inputs. HMRC do not accept that any part of the production inputs (relating to the production of the opera for performance to the public during the summer season) were "used or to be used" in making the taxable supplies of CDs. The purchase of costumes, sets and props were in no way linked to those onward supplies.[54]We do not accept HMRC's argument. The production and presentation of the particular opera is in a real sense a source of the CD. Without its appearance as an operatic event during the season there would have been no CD. There had to be rehearsals and a live presentation to make the recording possible. It was only made possible by the prominence it had given to an otherwise unknown opera that underwriters could be recruited and a market for the sales of the eventual CDs could be developed. We think therefore that there was a direct and immediate link between the two productions and the recordings made of them. The relevant input tax is therefore allowable. Conclusions[55]For the reasons given above we allow Garsington Opera's appeals on all the points in dispute. Costs[56]We award Garsington Opera their costs of this appeal. SIR STEPHEN OLIVER QC RELEASE DATE: 28 April 2009 APPENDIX Relevant Legal Provisions Section 24 of the VAT Act 1994 provides:(1) Subject to the following provisions of this section, "input tax", in relation to a taxable person, means the following tax, that is to say – (a) VAT on the supply to him of any goods or services; (b) VAT on the acquisition by him from another member State of any goods; and (c) VAT paid or payable by him on the importation of any goods from a place outside the member States; being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him. Section 26 of the Act provides: 26. Input tax allowable under section 25 (1) The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is input tax on supplies, acquisitions and importations in the period) as is allowable by or under regulations as being attributable to supplies within subsection (2) below.(2) The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business – (a) taxable supplies; …(3) The Commissioners shall make regulations for securing a fair and reasonable attribution of input tax to supplies within subsection (2) above, and any such regulations may provide for – (a) determining a proportion by reference to which input tax for any prescribed accounting period is to be provisionally attributed to those supplies; (b) adjusting, in accordance with a proportion determined in like manner for any longer period comprising two or more prescribed accounting periods or parts thereof, the provisional attribution for any of those periods; Regulation 101 of the VAT Regulations 1995 (SI 1995/2518) provides: Attribution of input tax to taxable supplies 101(1) Subject to regulation 102, the amount of input tax which a taxable person shall be entitled to deduct provisionally shall be that amount which is attributable to taxable supplies in accordance with this regulation. (2) In respect of each prescribed accounting period – (a) goods imported or acquired by and … goods or services supplied to the taxable person in the period shall be identified. (b) there shall be attributed to taxable supplies the whole of the input tax on such of those goods or services as are used or to be used by him exclusively in making taxable supplies; (c) no part of the input tax on such of those goods or services as are used or to be used by him exclusively in making exempt supplies, or in carrying on any activity other than the making of taxable supplies, shall be attributed to taxable supplies, and (d) there shall be attributed to taxable supplies such proportion of the input tax on such of those goods or services as are used or to be used by him in making both taxable and exempt supplies as bears the same ratio to the total or such input tax as the value of taxable supplies made by him bears to the value of all supplies made by him in the period.

Cited in 2 later judgments