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 LIMITEDAppellant
- 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
1
DECISION
1.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.