Following the tribunal decision in favour of Garsington Opera, HMRC have issued Brief 65/09 on VAT deduction by theatres on production costs. Garsington successfully argued that there was a direct and immediate link between production costs and both the culturally exempt admission and various taxable supplies, including sponsorship, touring, programmes, intellectual property rights and occasional supplies of props and equipment. Therefore in certain circumstances in-house production costs may be treated as residual and the VAT thereon partly recovered.

The revised policy issued by HMRC outlines that there must be firm intention to make the taxable supply when the cost is incurred as demonstrated by clear financial commitment. The intention to make a relevant taxable supply must be genuine but partial recovery is maintained even if this intention is frustrated. Therefore care should be taken in budgeting to demonstrate intention to make relevant taxable supplies.

HMRC have indicated in the Brief that organisations are expected to apply the Standard Method Override (SMO) if standard partial exemption methods result in a distortion in recovery, although de minimus limits apply. An example of a "fair" calculation is provided in the Brief but this particular method is neither mandatory or necessarily recommended. Organisations may wish to consider alternatives which are more appropriate.

Members who believe they qualify for input tax recovery on in-house production costs should submit and follow up retrospective claims as soon as possible and review budgeting procedures. The full Brief is available at http://www.hmrc.gov.uk/briefs/vat/brief6509.htm