Abstract: The Royal Opera House appealed against an Upper Tribunal (Tax and Chancery Chamber) decision refusing the charity’s claim to deduct the input tax incurred on its production costs from the output tax paid on its catering supplies. The issue was whether those services were “directly and immediately linked”.


The Court of Appeal, with Lord Justice David Richards giving judgment, has upheld an Upper Tribunal (UT) decision refusing a claim by the Royal Opera House (ROH), represented by Edwin Coe LLP, to deduct the Value-Added Tax (VAT) paid by it on production costs from the VAT chargeable on its catering supplies. Royal Opera House Covent Garden Foundation v HMRC [2021] EWCA Civ 910. In doing so, Lord Justice David Richards emphasised that small variations in facts can make a decisive difference to the outcome and “a direct and immediate link” between the input and output tax required in these circumstances is both a question of law and fact.


The ROH – one of the world’s most celebrated theatres and the home of The Royal Ballet, The Royal Opera and The Orchestra of the ROH – stages performances in its main auditorium. These performances are “highly acclaimed” and they are the “central draw” or the “core” of its commercial proposition. The ROH also offers extensive catering facilities via its restaurants, and a champagne bar.

After purchasing a ticket to attend a performance at the ROH, customers are sent an email detailing the various catering options on offer so that a table can be booked in advance. Once booked, a table is made available for the entire evening until the end of the last interval. The facilities offered by the ROH are therefore a key element for visitors attending a performance there and place the ROH a step above a West End theatre “where there might be a cramped bar or just ice creams available”.

Based on what was referred to a “virtuous circle” of high-quality artistic output driving demand for the catering offered, the ROH sought to deduct a proportion of the VAT paid on “Production Costs” (the fees for guest performers and conductors, creative teams, music costs, the cost of sets, props, costumes, transportation, extras and actors etc.) from the VAT chargeable on its “Catering Supplies” (sales of food and drink from ROH’s bars and restaurants). That claim related to VAT totalling £532,069 paid by the ROH between 1 June 2011 and 31 August 2012.

The Right to Deduction

The basic relevant principles of VAT law are well-settled and, relatively speaking, straightforward. A “taxable person” such as the ROH is liable to account to HMRC for VAT. VAT applies to all taxable supplies of the taxable person i.e. all supplies of good and services for consideration, which are part of its economic activities, even where the transaction does not give rise to any form of profit, unless the supply is exempt. Supplies of admission to see a ballet or opera performance are exempt. Restaurant and bar supplies are taxable.

Under Article 168 of the Council Directive 2006/112/EC, commonly referred to as the “Principal VAT Directive”, a VAT deduction arises where VAT is paid by a taxable person on supplies of goods or services received (input tax) which are used by it for the purposes of its taxable transactions, generally the making of supplies on which VAT is charged (output tax). Input tax is then deducted from the taxable person’s output tax; the VAT which must be paid to HMRC (or which is refundable) being the difference between the two. The right to deduct does not apply to input tax on goods or services used only to make exempt supplies (e.g. tickets). Case law establishes that a taxpayer may only deduct input tax if there is a “direct and immediate link” between the input and the output. A taxpayer can deduct a proportion of the input tax incurred on a supply if that input is directly and immediately linked to a taxable output as well as to an exempt output.

The question before the court was whether there was a direct and immediate link between ROH’s Production Costs and Catering Supplies.

What was the ROH’s Argument?

The ROH’s case was that its Production Costs and its Catering Supplies together met this nexus threshold and it was therefore entitled to a VAT deduction. It argued that:

  1. Earlier decisions in the Court of Justice of the European Union (CJEU) established the need to look at the “ultimate economic purpose” of a particular input. The ROH submitted that the Production Costs functioned in part to attract the ROH’s customers to consume and pay for its Catering Supplies. There consequently existed an “objective economic link” between these input and output transactions.
  2. The opera and ballet performances and the Catering Supplies formed part of the same “integrated visitor experience” and that helped enable the necessary link to be found on the ROH’s facts. There was a direct and immediate link between the Production Costs and the Catering Supplies in parallel to such a link to the performances. The admission of customers to see performances was not a “chain-breaking” transaction breaking the necessary link between the Production Costs and the Catering Supplies.
  3. Whilst there was a more obvious direct and immediate link between ROH’s Production Costs and its exempt supply of tickets to performances the search was not for the closest link but for a sufficient, direct and immediate, link and there was such a link between Production Costs and Catering Supplies.

The Court’s Decision

The Court of Appeal disagreed. It did so on three principal grounds:

  1. First, the ROH’s interpretation of the “necessary economic link” needed to establish the required direct and immediate link sought to (wrongly) broaden the direct and immediate link test. The court considered that in recent judgments the CJEU had intended to assist with the interpretation and nature of the direct and immediate connection required to satisfy the test and not expand its scope, at least not in direct attribution cases (i.e. in cases not involving “overheads” with a direct and immediate link only to the supplier’s business as a whole). Cases such as ‘Sveda’ UAB v Valstybine mokesčių inspekcija prie Lietuvos Respublikos finansų ministerijos (Case C-126/14) [2016] STC 447 and in HMRC v Associated Newspapers Ltd [2017] STC 843, CA were also to be distinguished because they were concerned with the impact of links with both taxable supplies and non-economic activity, as opposed to links with both taxable supplies and exempt supplies
  2. Second, the First-tier Tribunal (FTT), which had found for ROH, had applied a test of economic or commercial necessity, which was not the correct test. The UT had been right to hold that there was no direct and immediate link between the Production Costs and Catering Supplies for the reasons it had given.
  3. Third, and obiter, whilst the UT and FTT had both concluded that there was no “chain-breaking” transaction because the sales of tickets and Catering Supplies were not links in the same chain of transactions, David Richards LJ, without deciding the point, saw great force in HMRC’s argument that the ticket sales were a chain-breaking transaction.


The Court of Appeal’s decision is a disappointment not just to the ROH, but the arts more widely, especially given the other problems which the industry has experienced during the ongoing pandemic. Although the court recognised that the link to a taxable supply did not have to be the closest link between that input and any supply to satisfy the direct and immediate link test, the fact that there was a very close link to exempt supplies of tickets may have been an important underlying factor.  The court ultimately was conservative and did not accept that the objective economic link, found by the FTT and not contested by HMRC on appeal, that existed between Production Costs and Catering Supplies, because investment in productions attracted customers for ROH’s Catering Supplies, was sufficient, not even in the context of a visitor experience which integrated consuming and enjoying both a performance and a restaurant meal eaten shorty before “curtains up” and during intervals in the performance. It is also concerning that the Court of Appeal cast doubt on the conclusion of both the FT and UT that there was no chain-breaking event without actually coming to any decision on the point. That cannot help promote certainty in the law.

A fine glimmer of hope is however to be found in the court’s emphasis that each case will turn on its own facts. The stage door has not been closed on the right to deduct VAT, but left ajar.

For more information, please contact Thomas Johnson or any member of the team.

Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.

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