The Mayflower Theatre Trust Ltd. v Revenue and Customs

Input tax is not irrecoverable merely because it is principally used in making exempt supplies. The critical question under the partial-exemption rules is whether it has been used exclusively for exempt supplies. If it has also been used for taxable supplies, residual tax is apportioned.

A direct and immediate link is assessed by reference to the objective use of the inputs, not only by asking whether their cost was included in the price of the outputs. The search is for a sufficient link, rather than the closest link.

The appellant, a charitable theatre operator, bought theatrical productions from independent production companies and claimed deduction of the VAT charged on those supplies. Its income included exempt ticket sales and various taxable supplies, including sponsorship and ancillary services.

The VAT & Duties Tribunal held that the production costs were used exclusively for exempt ticket sales and denied deduction. The appeal concerned whether those costs were residual inputs used for both taxable and exempt supplies.

1. Appeal allowed. Regulation 101(2) creates three possibilities: input tax used exclusively for taxable supplies; input tax used exclusively for exempt supplies; and residual input tax used for both, or not specifically attributable to either.
2. The relevant question was whether the production costs were used exclusively for exempt ticket sales. The direct and immediate link or cost-component inquiry requires a sufficient link, not necessarily the closest link. It does not require proof that the input cost was included in the output price in a narrow accounting sense.
3. Inputs may be residual because they are overheads of the business as a whole, or because they are directly and immediately linked to particular taxable and exempt supplies. The Tribunal’s reliance on the accounts’ classification of production costs as cost of sales did not establish exclusive use for exempt supplies.
4. On the Tribunal’s findings, sponsorship income resulted from a single taxable supply which included the provision of tickets. Production costs were linked to that taxable right of admission in the same way as to exempt public ticket sales. They therefore could not be treated as used exclusively for exempt supplies.

The judgment was an appeal from the decision of the VAT & Duties Tribunal dated 26 August 1995. The Tribunal had rejected deduction of the input tax. The High Court allowed the appeal.