Theatres able to claim back production costs against VAT

Not only has HM Revenue & Customs been left with a bloody nose after its
VAT battle against Mayflower Theatre Trust, but the taxman has been left in a
much worse position than it was before it appealed.

The case means that theatres will be able to claim back a proportion of
production costs against VAT.

Ticket income theatres receive is VAT exempt under rules introduced in 1996.
But the situation for the costs of producing shows was more complicated, with
theatres unable to claim VAT charged on production costs. Mayflower claimed a
VAT exemption on such costs associated with productions it was putting on.

HMRC challenged that, and has so far lost its claim at every stage.

The Court of Appeal upheld an earlier decision that Mayflower was able to
reclaim a proportion of VAT charged on the cost of hosting theatrical
productions.

Mayflower had argued that though fees paid to production companies for the
right to host productions were not solely related to the VAT-exempt sale of a
ticket, theatres should be able to recover a proportion of VAT on this
expenditure.

The court ruling establishes a link between programme sales – which are zero
rated – and the cost of hosting theatrical productions. So theatres that sell
programmes can reclaim VAT on productions.

But there is also a sting in the tail for the theatres. Deloitte indirect tax
director Simon Baxter said that as programme sales are just a part of the total
income generated by the theatre, this proportion of taxable income is the only
one that can be reclaimed.

However, Baxter suggested that the ruling would open HMRC to several million
pounds of VAT reclaims a year.

‘The scope of the Court of Appeal’s judgement means that many similar
businesses will be entitled to seek a refund of previously overpaid VAT,’ said
Baxter.

‘The biggest theatres could be looking at £100,000 to £150,000 a year in
reclaims.’