19254

VAT – INPUT TAX – Theatre engaged production companies to put on shows – whether the input tax arising from the consideration paid to the production companies was exclusively attributable to exempt supplies (sale of show tickets) or attributable to both taxable and exempt supplies – analysed each of the Appellant’s taxable supplies no direct and immediate link found between the consideration paid and any one of the taxable supplies – input tax arising from consideration paid exclusively attributable to exempt supplies – Appeal dismissed. 

VAT – APPEALS – SECTION 85 VATA 1994 AGREEMENT – Previous Appeal by Appellants allowed by consent – did this Appeal constitute a section 85 agreement – yes – did the scope of the agreement prevent the Tribunal from adjudicating on whether the input tax arising from the  consideration paid to the production companies during the relevant period was either attributable to exempt supplies or to both exempt and taxable supplies – no - because the scope of the agreement was limited to the cultural exemption issue – Tribunal had jurisdiction to determine the disputed matter for the relevant period – Appeal dismissed.     

LONDON TRIBUNAL CENTRE

	THE MAYFLOWER THEATRE TRUST LTD	Appellant

	- and -

	HM REVENUE and CUSTOMS	Respondents

			Tribunal:	MICHAEL TILDESLEY OBE (Chairman)
					RACHEL ADAMS FCA ATII

Sitting in public in London on 29 & 30 June 2005

Phillippa Whipple, Counsel instructed by Deloitte and Touche for the Appellant

Sean Wilken and Eleni Mitrophanous, Counsel instructed by the Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2005   

DECISION
The Appeal

1.	The Appellant was appealing against the Respondents’ refusal of 9 February 2003 (confirmed on reconsideration dated 21 May 2003) to authorise repayment of input tax in the sum of £679, 694 for the VAT periods ending March 1999 to December 2002.
The Issues in Dispute
2.	The Appellant was a company limited by guarantee, registered as a charity with the principal aim of encouraging the Arts. The Appellant carried on business as a theatre in Southampton. The Appellant paid production companies to put on performances in the theatre. Following the European Court of Justice decision in Customs and Excise Commissioners v The Zoological Society of London [2002] STC 521 the Appellant was within the terms of the cultural exemption which meant that its supply of tickets for performances was exempt from VAT. Prior to the London Zoo decision the Appellant charged VAT on ticket supplies. The Respondents have repaid the VAT charged on these supplies. The Appellant was seeking to extend the scope of the repayment by its contention that the input tax on the consideration paid by the Appellant to the production companies was attributable to taxable and exempt supplies. If its contention were correct the Appellant would recover a proportion of the input tax (known as residual input tax) under the partial exemption rules. The Respondents, on the other hand, was saying that the input tax on the consideration was attributable exclusively to the ticket sales, an exempt supply, which meant that no input tax could be recovered. This formed the first disputed matter of this Appeal.
3.	The second disputed matter concerned a previous Appeal by the Appellant which was settled by consent. The Appeal related to the Appellant’s repayment claims for the VAT periods ending March 1999 to December 2001.  The Appellant stated that the repayment allowed on the Appeal included the VAT on the ticket sales and the residual input tax arising from the consideration paid. In the Appellant’s view the Respondents were estopped by operation of law from going behind the terms of the Appeal settled by consent. The Respondents disagreed contending that the Appeal was only concerned with the repayment of VAT on ticket sales. 
The Evidence
4.	We heard evidence from the following:
(1)	Dennis Leslie John Hall, Chief Executive of Mayflower Theatre Trust Ltd.
(2)	Wycliffe David Musuku, Finance Director and Company Secretary of Mayflower Theatre Trust
(3)	Patrick William Paul Howe, officer of HM Revenue and Customs who was involved in the discussions with the Appellant about the partial exemption.
(4)	Philip Wynne Houghton, officer of HM Revenue and Customs who was also involved in the discussions with the Appellant about partial exemption.
(5)	Kieran Joseph McLaughlin, Appeals and Reconsideration Officer of HM Revenue and Customs at Southampton who handled the Appeal from December 2003. 
5.	The witness statement of Philip Robert Mattacks of HM Revenue and Customs was received in evidence. Appellant’s counsel requested that no weight should be attached to the statement because the author was expressing an opinion on the law which was a matter ultimately for the Tribunal to decide.
6.	An agreed bundles of documents and authorities were provided to the Tribunal.
Issue One: Is the input tax on the consideration paid by the Appellant to the Production Company attributable to exempt and taxable supplies?
Facts Found
7.	The Appellant was a registered charitable trust and company limited by guarantee, having been incorporated in 1989. The Appellant had the following aims:
(1)	To preserve and maintain the Mayflower Theatre (hereinafter the Theatre) for the local community.
(2)	To support drama, dance and opera in Hampshire by the provision of quality products.
(3)	To increase the security of the Theatre by increasing its assets.
8.	The Theatre was located in Southampton and built in 1928. In 1942 the Theatre was taken over by Gaumont British Picture Corporation and became a cinema. In 1982 the Theatre’s owners submitted a proposal to Southampton City Council for a change of licence which would convert the Theatre to a bingo hall. The proposal created public outcry with the result that the Theatre was bought by Southampton City Council. The Council handed over the control of the Theatre to an independent charitable trust (the Appellant), which was given a 125 year lease of the premises at a peppercorn rent.
9.	The Theatre was now the fourth largest in the country with a seating capacity in excess of 2,200. The Theatre serviced the entire southern region of the United Kingdom with patrons driving for up to 70 minutes to attend a performance at the Theatre.
10.	The Appellant’s turnover for the year ending March 2003 was £9.5 million (30 per cent more than previous years). Ticket sales formed the principal component of the turnover with non-ticket sales constituting about 20 per cent of the turnover. The Appellant also earned additional operating income from investments and sponsors which amounted to £24,500 for the year ending March 2003. The Appellant’s expenditure went on cost of sales (£6.7 million), selling and marketing expenses (£1.13 million) and administrative expenses (£1.18 million) producing an operating profit of £1 million which was an exceptional year for the Appellant, owing principally to an exceptional item in the operating income. The Appellant no longer received revenue grants from Southampton City Council and was reliant on its trading income. 
11.	The vast majority of the Appellant’s taxable activities were run through its trading subsidiary, Mayflower Enterprise Ltd, which was VAT grouped with the Mayflower Trust. The subsidiary’s turnover for the year ending 31 March 2003 was £1.05 million which resulted in an operating profit of £190,000.   
12.	The Appellant did not produce its own performances but engaged production companies for this purpose. The programme of productions for any one year has a lead in period of up to two years prior to the performance. The programme was varied consisting of ballet, opera, drama, musicals, comedy, pantomime and rock and pop performances but generally the productions were large scale, popular with an established track record. The Appellant recently experimented with staging drama productions, such as “Rebecca”, “Art” and “Inspector Calls”.
13.	The Appellant sold the tickets for the productions either through its own box office or through a “ticketing agency” and retained the sale proceeds. The Appellant would pay a consideration to the production company for putting on the performance with the company bearing the costs of the production including a proportion of the marketing expenses.  The size of the consideration paid by the Appellant would depend upon the relative strength of the negotiating positions of the parties, the costs of the production and the projected ticket sales for the performance.  In the case of  “Miss Saigon” the consideration paid to the production company by the Appellant consisted of:
(1)	A guaranteed weekly amount to the production company during the performance of the show.
(2)	The Appellant and the production company shared the proceeds of the weekly ticket sales for the show which exceeded the guaranteed weekly amount. The proportion shared was calculated by means of a formula agreed in the contract.
(3)	 The Appellant charged the production company rent for use of the Theatre during the weeks of “Get in and Fit-up” prior to the performance. Also the Appellant recovered expenses for specific services to the company, such as, piano tuning, use of the Theatre’s car park and provision of dry ice.
Thus the eventual consideration paid by the Appellant to the production company was the guaranteed weekly amount plus the agreed share of the ticket sales over and above the guaranteed amount less the rent for rehearsal weeks and the expenses incurred by the Appellant for specific services provided to the company.
14.	 In “Miss Saigon” the production company under the terms of its contract with the Appellant was allowed to sell its own merchandise on the Theatre premises. The Appellant retained an agreed percentage of the merchandise sales which was deducted from the eventual consideration paid to the production company.
15.	The structure of  the agreement for the “Miss Saigon” production was typical of the deals struck by the Appellant with other production companies. The principal variation between the deals was the detail of the arrangements for allocating the ticket sales between the Appellant and the companies. Where the Appellant’s negotiating position was strong it would retain a greater share of the ticket proceeds. Before entering into negotiations with the companies’ representatives, the Appellant’s Chief Executive would consider:
(1)	 The size of the production which would determine the rent for the “Get in and Fit out” period.
(2)	  The projected level of ticket sales and non ticket income which would be based on detailed historical information of past or similar productions.
(3)	The pricing for the tickets.
According to the Chief Executive the representatives would be well aware of the level of non-ticket income that the Appellant would receive from the production. There was no documentary evidence, however, produced by the Appellant which demonstrated a tangible link between the level of consideration paid to the companies by the Appellant and the Appellant’s income received from the non ticket sales. The consideration in the “Miss Saigon” contract was based solely on the ticket sales less the Appellant’s expenses for specific services provided to the production company.
16.	 The pricing of the tickets for the performances would again be a matter of negotiation between the parties. In “Miss Saigon” the production company had the upper hand because it was a national tour with a national pricing structure. However, the Appellant did retain the exclusive right to issue complimentary tickets to the Press and bona fide bill exhibitors displaying bills advertising the attractions to the Theatre. The Appellant with the consent of the production company retained the right to issue additional discounted, standby and other categories of complimentary tickets.
17.	The consideration paid to the production companies was recorded in the Appellant’s accounts as “cost of sales” not as general overheads. The consideration was also distinguished in the accounts from the selling costs of the Appellant’s taxable activities which were recorded under the separate heading of “selling and marketing expenses”. 
18.	 The Appellant’s Finance Director explained that this was the way the consideration had always been treated historically in the accounts and was not an accounting requirement. In his view the accounting treatment was not any indication of how the consideration contributed to the Appellant’s business as a whole. We are of the view that the accounting treatment is a valid indicator of the status of the consideration, particularly as the accounts have been signed off by reputable auditors expressing the opinion that the accounts give a true and fair view of the Appellant’s state of affairs. Also the consideration was specific to each production, the size of which varied depending upon the nature of production. We, therefore, find that the consideration paid to the production companies was not part of the Appellant’s general overheads. 
19.	The ticket sales were exempt supplies for VAT purposes.
20.	 The Appellant as part of its business generated a range of taxable supplies categorised as non ticket income. Each of those supplies or groups of supplies will now be considered in turn.
21.	The Appellant produced and sold programmes for each production. The programme would contain information about the show, cast members, the director, the writer and other information specific to the production. The programme was sold separately from the ticket. The price for the programme was fixed at £3 which did not vary between productions.  The principal drivers of the programme price were preparation costs together with an assessment of what the purchaser would pay. The Appellant did experiment with a price of £3.50 but encountered considerable consumer resistance to the increased charge. The sale of programmes was zero-rated for VAT purposes.
22.	The Appellant sold confectionary and drinks from the Theatre premises. These sales were standard rated for VAT purposes. The sale of confectionary took place in the entrance foyer at the refreshments counter which opened 60 minutes before the performance and during the interval. Good quality ice cream was also sold from various kiosks. The Theatre had its own bars from which drinks could be purchased at the same time as the sale of confectionary. The Appellant experimented with daytime opening of the bars unconnected with the performances. The experiment, however, was not a commercial success because of the location of the Theatre away from the City Centre and the position of the bar below ground level which did not engender a welcoming feeling. The drinks and the confectionary were sold separately from the tickets for the performances. The price did not vary between performances. The Appellant’s management reviewed the pricing structure for the confectionary and drinks at approximately six-month intervals. The price was based on a 60 to 70 per cent mark up from the wholesale cost of the goods sold together with an assessment of what the market would bear. The management would ensure that the bar prices were on par with its competitors in the local area.
23.	The Appellant sold merchandise from its shop within the Theatre. The merchandise fell in two categories. The first involved the Appellant’s own merchandise which was sold from a set stock and did not vary in price and range from performance to performance except the pantomime when the Appellant bought in specific merchandise. The merchandise was sold separately from the tickets for the performance. The selling price of the merchandise represented a percentage mark up from the cost of buying it in and what the market would afford. 
24.	The second category consisted of the production companies’ merchandise which the Appellant sold on behalf of the company. The Appellant retained 25 per cent of the sales which was deducted from the consideration paid to the companies. The 25 per cent represented the Appellant’s costs of selling the merchandise, such as employee time. Sales of merchandise were standard rated for VAT purposes.
25.	The Appellant has expanded into corporate entertainment. The timing of the expansion coincided with the conversion of the Wessex suite from offices to a functions suite in March 2003. This conversion post-dated the end period of the repayment claim which was the subject of this Appeal. The evidence of the Appellant’s Chief Executive was unclear about the prevalence of corporate entertainment during the period of the repayment claim. His witness statement suggested that corporate entertainment was a rare event before March 2003, which was at odds with his evidence before the Tribunal that corporate entertainment had been a feature of the Appellant’s activities for a long period. We have decided that corporate entertainment was held during the repayment period with the structure of those events being the same as what the Appellant adduced in evidence for the corporate entertainment commencing March 2003. 
26.	The entertainment consisted of a range of eating opportunities in the Theatre from finger buffets to sit down meals separately priced which could be purchased by groups of people in conjunction with attending a performance. The price of the menu of eating opportunities was the same for each production. The Appellant arrived at the price by deciding on the appropriate mark up from cost of the food and the choice of the consumer. Although the customer may pay one price for the entertainment and attending the show, it was clear from the Chief Executive’s witness statement and the documentary evidence that the pricing structure for attending the performance was separate from the pricing structure for the eating entertainment. The Chief Executive accepted that there was one ticket for the food and one ticket for the performance. The terms and conditions for the corporate entertainment specified that group tickets for the performance had their own and different terms and conditions. The Appellant gave no guarantee that a function suite would be available on the same date that tickets would be required for the show. The Appellant also let its function suite for events during the day where the persons attending would not be going to the performance, such as training. The supply of the corporate eating entertainment was standard rated for VAT purposes.
27.	The Appellant organised theme evenings for various performances, where the Theatre patrons would purchase their tickets and have a meal in the function suite. The suite and the meal would match the theme of the show, for example, “Grease”, burger and chips would be served with the waiters and possibly the patrons wearing attire that matched with the show. The Appellant accepted that the theme evenings were not a feature of the Appellant’s activities during the period of the repayment claim. Also the Appellant gave no evidence about how the proceeds from the ticket sales for the theme evenings were factored into the consideration element of its contract with the production companies.
28.	 The Appellant made supplies of sponsorship which were taxed at standard rate VAT. The sponsorship took various guises but was grouped together under “other operating income” in the Appellant’s accounts which was recorded separately from “turnover and cost of sales”. The income from sponsorship amounted to £23,500 in the year ending March 2003. Prospective sponsors were not restricted to Theatre patrons. The pricing of the various sponsorship deals did not fluctuate with the type of productions staged at the Theatre. Essentially the Appellant formed an assessment of the value of the deal on offer to the prospective sponsor which was influenced by what the sponsor would pay. The various forms of sponsorship income were as follows:
(1)	Individuals were able to sponsor seats in the auditorium for the sum of £250, which enabled their name to be affixed to the seat for a fixed period of time.  There were no other benefits attached to the sponsorship.  
(2)	The Appellant offered exclusive sponsorship packages to local commercial firms which allowed the sponsor to advertise the firm within the Theatre and/or the Appellant’s publications in return for a set fee for a specific period of time ranging from one year to three years. The extent of the advertising would determine the size of the fee paid by the sponsor.  As part of the agreement, the Appellant would also give the sponsor a range of benefits which may include a set number of complimentary tickets and programmes, use of the corporate hospitality suites without charge, purchase of show tickets at corporate rate by the sponsor’s members of staff and backstage tours of the theatre. The size of the fee would fix the range of benefits received by the sponsor. Specific examples of sponsorship agreements included advertising the sponsor’s logo on the safety curtain, prominent adverts in the Appellant’s programme of events and naming the sponsor on the Corporate boards within the Theatre. In one instance the sponsor provided the Appellant with unlimited use of a new motor van instead of paying the fee.
29.	Under its agreement with the production company for “Miss Saigon”, paragraph 15.7 specified that
“The Appellant (my italics) reserves to itself the sole and exclusive right to participate in sponsorship activities and the display or exhibition in the Theatre of advertising matter by means of notices posters, films or otherwise whatsoever, to advertise in and about the Theatre the presentation of forthcoming entertainment and to let corporate entertaining facilities and all receipts and expectant revenues accruing from such letting, sales, advertisements shall be retained by the Appellant. The Appellant shall obtain written approval from the Touring Manager for any sponsorship that relates in any way to the production”.

In our view the contents of this clause confirmed that receipts from sponsorship and from lettings of the corporate entertainment facilities at the Theatre did not form part of the arrangements with the production companies.  The receipts from these income streams were not factored into the computation of the consideration paid by the Appellant to the companies. Paragraph 15.7, however, required the Appellant to obtain written approval from the production company for sponsorship that related to the specific production. None of the examples cited in paragraph 28 related to sponsorship of specific productions.
30.	The Appellant, however, asserted that businesses sponsored individual productions. The Appellant produced Microsoft Powerpoint presentations from local radio companies to support its assertion. These presentations detailed proposals by the radio company concerned to market on its airwaves a specific production for a period of time to coincide with the staging of the production in return for the payment of a lump sum plus the provision of non-monetary benefits by the Appellant. The benefits consisted of advertising the radio company in the Appellant’s publications, tickets and programmes for the show, interviews with the performers and in one instance a trip to Disneyland Paris for a family of four. The Appellant supplied no evidence of an actual sponsorship agreement with a radio company which sets out the respective responsibilities of each party. 
31.	The radio companies referred to their proposals as advertising proposals or campaigns not as sponsorship. The “Miss Saigon” contract required the production company to pay a proportion of the marketing for the production which included specific marketing campaigns. The Wave radio company’s proposal for “Miss Saigon” was addressed to the Appellant and Cameron Mackintosh, the production company. The Appellant has not satisfied us on the balance of probabilities that the radio companies’ presentations amounted to sponsorship of individual shows.  We prefer the description:  marketing or advertising campaigns, which was adopted by the radio companies.   In our view the evidence suggests that these campaigns were part of the costs of the production companies.
32.	The Appellant made taxable supplies to the production companies which included but not limited to dry ice, cleaning or repair as a result of smoking, piano tuning, telephone/fax/photocopies, agency/credit card commissions, additional equipment, hire of plant and provision of late night transport. The Miss Saigon agreement stipulated that the production company would be responsible for the costs of these supplies which confirmed that these taxable supplies were part of the production costs.
33.	The Appellant supplied opera glasses hire and payphone facilities within the Theatre. The provider determined the price of these supplies with the Appellant retaining a fixed percentage of the sale proceeds. The price did not vary with the production staged at the Theatre.  
34.	Appellant’s counsel cited in its skeleton argument booking fees as another type of taxable supply. However, counsel indicated at the hearing that the Appellant was no longer relying on booking fees.
35.	The Appellant carried out regular surveys of its customers which showed that the majority of them agreed that the availability of products at the Theatre enhanced their enjoyment. The majority also agreed that a programme was important to their enjoyment.  The Chief Executive relied upon the surveys to improve the facilities at the Theatre, for example increasing the leg-room between the seats. 
Legislation
36.	Article 2 of the EC First Council Directive 67/227/EEC provides that 
“The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, whatever the number of transactions which take place in the production and distribution process before the stage at which tax is charged.
On each transaction, value added tax, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components.
The common system of value added tax shall be applied up to and including the retail trade stage”.
37.	Article 17(2) of the EC Sixth Council Directive (77/388/EEC) gives a taxable person the right to deduct input tax “in so far as goods and services are used for the purposes of his taxable transactions”. 
38.	Article 17(5) of the EC Sixth Council Directive (77/388/EEC) deals with the situation where the taxable person makes taxable and exempt supplies. In this situation the person can only deduct such proportion of input tax that is attributable to taxable supplies. Article 19 provides the formula for calculating the proportion of input tax that can be deducted.
39.	The European legislation dealing with deduction of input tax is enacted in section 26 of the VAT Act 1994  which provides for deduction of such input tax as is allowable by or under regulations as being attributable to taxable supplies. Section 26(3) gives the Commissioners the power to make regulations for securing a fair and reasonable attribution of input tax to taxable supplies.
40.	Regulation 101(2) of the VAT Regulations 1995 (SI 1995/2518) provides that
a)	not relevant to this Appeal.
b)	There shall be attributed to taxable supplies the whole of the input tax on such of those goods or services as are used or to be used by him exclusively in making taxable supplies.
c)	No part of the input tax on such of those goods or services as are used or to be used by him exclusively in making exempt supplies …. Shall be attributed to taxable supplies.
d)	There shall be attributed to taxable supplies such proportion of the input tax on such of those goods or services as are used or to be used by him in making both taxable and exempt supplies as bear the same ratio to the total of such input tax as the value of the taxable supplies made by him bears to the value of all supplies made by him in the period.
In this Appeal the Appellant was saying that the consideration paid to the production companies was attributable to both taxable and exempt supplies. The proportion of the consideration  that can be deducted as input tax would be determined by the formula in Regulation 101(2)(d). The Respondents, on the other hand, was saying that Regulation 101(2)(c) applied to the consideration in that none of it can be deducted as input tax because it was used by the Appellant exclusively to make exempt supplies, namely the sale of tickets for the performance.
Cases
41.	We were referred to a considerable body of case law which identified the legal principles behind the right to deduct input tax under Article 17 (2) of the EC Sixth Council Directive (77/388/EEC). The starting point was the decision of the European Court of Justice in BLP Group plc v Customs and Excise Commissioners (Case C-4/94) [1995] STC 424 where BLP sought to deduct VAT on professional services incurred on a disposal of shares in a subsidiary (an exempt supply) on the basis that the purpose of the sale was to raise funds to pay off debts arisen directly from its taxable transactions. The Court decided that the right to deduct under Article 17(2) arose only in respect of goods and services which had a direct and immediate link with taxable transactions; the ultimate aim pursued by the taxable person was irrelevant. The direct and immediate link was to be derived from an objective analysis of the transaction in question. The Advocate General (C O Lenz) considered that input tax could be deducted only to the extent that goods or services on which it has been paid were cost components of a taxable transaction. According to the Advocate General it was critical within the objective analysis to distinguish as clearly as possible the different types of transactions carried out by the taxable person.   
42.	The European Court of Justice in Midland Bank plc v Customs and Excise Commissioners (Case C –98/98) [2000] STC 501 confirmed the test of direct and immediate link as enunciated in BLP with the rider that the right to deduct, once it had arisen, was retained even if the economic activity envisaged did not give rise to taxable transactions by reason of circumstances beyond the control of the taxable person. The Court went on to state that the direct and immediate link test presupposed that the expenditure incurred in obtaining the goods or services for the purposes of the taxable transactions were part of the cost components of those transactions. Those cost components generally had to arise before the taxable person carried out the taxable transactions to which they related. Further the Court ruled that it was for the national courts to apply the direct and immediate link test to the facts of each case and take account of all the circumstances. It was impossible, in the Court’s view, to specify the method of determining the necessary relationship that had to exist between the input and output transactions in order for input VAT to be deductible because of the diversity of commercial and professional transactions. 
43.	In Midland Bank at paragraph 29 the Advocate General (Saggio) explored the meaning of direct and immediate link stating that
“The use of the two adjectives direct and immediate cannot but refer to a particularly close link between the taxable transactions and the goods or services supplied by another taxable person….. In particular, the adjective direct means that there cannot be the appropriate link between two transactions where a third transaction takes place between them breaking the causal chain or where the link is very distant in time….. The adjective immediate denotes a particularly close temporal proximity between the two transactions”.
44.	The European Court of Justice again considered the issue of direct and immediate link in Abbey National plc v Customs and Excise Commissioners (Case C –408/98) [2001] STC 297 which involved the disposal of a property as a transfer of a going concern. This case was of interest because of the views of the Advocate General (Jacobs) at paragraph 35 on the scope of the direct and immediate link test:
“Thus what matters is whether the taxed input is a cost component of a taxable output, not whether the most closely linked transaction is itself taxable. As the Commission submitted at the hearing, the conclusion to be drawn from BLP group is that the question to be asked is not what is the transaction with which the cost component has the most direct and immediate link but whether there is a sufficiently direct and immediate link with a taxable economic activity”. 
45.	 In Customs and Excise Commissioners v Southern Primary Housing Association Ltd  [2004] STC 209 the appellant acquired land on which the option to tax had been exercised which was subsequently sold without opting for tax. At the same time it entered into a development contract with the purchaser of the land (a housing association) and sought to deduct the tax paid on its original purchase in relation to the taxable supplies within the development contract. The Court of Appeal held that the appellant was not entitled to deduct the tax.  Jacob LJ at paragraphs 32 and 33 stated that
“….. The land purchase transaction was commercially necessary to make its performance commercially possible, but it was not a cost component of the contract itself in the same way as the costs of materials used. There is a link with the contract but the link was not direct and immediate. The development contract would not have been made but for the associated land purchase and sale. But “but for” is not the test and does not equate to the direct and immediate link and cost component test.
One can look at it another way. There is nothing about the development contract as such which makes the land purchase and sale essential. If the housing association had already owned the land or had bought it from some third party, the inputs of the development contract would have been just the costs of carrying it out. The fact that there were commercially linked land transactions does not mean that those transactions are directly linked to the costs of the development contract. One would not say that the cost of buying the land was a cost of the development contract itself. It follows that the input tax on that cost is not a cost of the contract.
At paragraph 37 Jacob LJ examined the approach adopted by the VAT and Duties Tribunal:
“Turning back to the tribunal, it concluded that there was a direct and immediate link between the land purchase and both the land sale and development contract, with both an exempt and a non- exempt transaction. VAT law does not work in such a generalised way. You have to look at transactions individually, component transaction by component transaction. They may be linked in the sense that one would not have happened without the other, but they remain distinct transactions nonetheless. Only if one transaction is merely ancillary to a main transaction can one disregard the nature of each transaction. If that were not so, the principle of neutrality would be violated. Moreover there would be intractable problems as to which input was being attributed to which part of the overall transaction. You may find, as here, taxable and exempt transactions all mixed up in the same overall transaction – which is illegitimate”. 
46.	In Dial-a-Phone Ltd v Customs and Excise Commissioners [2004] STC 987 the Court of Appeal held that advertising costs incurred by the Appellant on the sale of a package comprising a mobile phone and insurance were not exclusively attributable to either the taxable supply of the phone or the exempt supply of the insurance and had to be apportioned in accordance with the partial exemption rules (regulation 101(4) of the 1995 Regulations). In reaching its decision the Court of Appeal relied on the findings of fact made by the VAT and Duties Tribunal, in particular that the advertisements and the offer of free insurance for a limited time related both to introducing customers to mobile phone airtime providers and to their insurance intermediary services. Jonathan Parker LJ in delivering the decision of the Court of Appeal restated the test of direct and immediate link at paragraphs 74 and 75:
“…. it is important to bear in mind (as the Advocate General observed in Abbey National…) a direct and immediate link may exist between the marketing and advertising costs and the insurance intermediary services despite the fact that there may be an even closer link between those costs and DaP’s taxable supplies. In other words, the quest is not for the closest link but for a sufficient link.
It follows that it matters not that the insurance intermediary services may be viewed as being in a commercial sense secondary to the making of the taxable supplies, or even that they may be provided only after a taxable supply has been made, provided that a sufficient direct and immediate link exists between them and the marketing and advertising costs”. 
Jonathan Parker LJ emphasised that the direct and immediate link test was fact sensitive with a substantial factual element. 
47.	Jonathan Parker LJ provided an helpful analysis of  the legal principles involved with the right to deduct input tax and the interrelationships between those principles. He said that
“In the first place, The Advocate General (BLP case) explains the rationale for the requirement in art 17(2) that, to be deductible, input tax must relate to goods or services used for the purposes of the taxable person’s taxable transactions by reference to the concept of a chain of (taxable) transactions ending with the final consumer, where VAT is charged on the value added at each link in the chain…. This in turn demonstrates the need to establish whether (and if so to what extent) a particular input cost is used for a taxable supply, as opposed to an exempt supply” (p 18).
“In the second place, in the context of the application of that test the Advocate General treats the expression cost component in article 2 of the First Directive as synonymous with the expression used for in Article 17(2) of the Sixth Directive” (p 19).
“Thirdly, in para 37 of his opinion the Advocate General concludes that the expression for the purposes of his taxable transactions in art 17(5) does not extend to the ultimate aim of the taxable person when incurring the relevant input costs rather it refers to the purposes of particular transactions. Thus … the mere fact that the input costs in question may be reflected in the prices charged by the taxable person for his taxable supplies will not suffice to render the input costs “cost components” of the taxable supplies” (p 20).
“Hence on the authority of BLP and Midland Bank, in applying  the used for test prescribed in art 17(2) of the Sixth Directive the relevant inquiry is whether there is a direct and immediate link between the input cost in question and the supply or supplies in question; alternatively whether the input cost is a cost component of that supply or those supplies. It is clear from the judgments of the ECJ in BLP and Midland Bank that there is no material difference between these alternative ways of expressing the basic test” (p 28).
48.	We were also referred to two decisions of the VAT and Duties Tribunal. The first Royal Agricultural College v Customs and Excise Commissioners [2002] VAT Decision 17508 concerned a claim by the College that its advertising costs should be attributed not only to its exempt supply of providing education to students but also to its taxable supplies, such as selling drinks in the student bars. The College contended that its advertising promoted the “Cirencester experience” which was not solely concerned with providing education. The Tribunal disagreed holding at paragraph 42:
“… The advertising also promotes the College’s wider interests such as taxable conferences. There is thus a link, but the question is whether it is both direct and immediate. The direct and immediate link is clearly that of attracting students to the College. The link that thereby they contribute to the College’s taxable activities such as for example, using the bar, is indirect, and not immediate, in the sense in which that term is used. It is that once at the College they will use the College’s facilities”. 
49.	The second decision was Southampton Leisure Holdings plc v Customs and Excise Commissioners [2002] VAT Decision 17716 which found that some professional services charged to the Appellant were attributable to both taxable and exempt supplies. At paragraph 51 the Tribunal identified the question to be answered:
“…. the real question is  whether the input supplies were used exclusively for the purpose of the exempt transaction (the issue of shares) or partly for exempt transaction and partly for the general purposes of the business. If the professional services were used both in respect of the issue of the shares and in respect of other matters then the input tax will be residual input tax. And that is a factual matter.
Submissions of the Parties
50.	It was common ground between the parties that the legal test to be applied to the facts of this Appeal was the direct and immediate link. They also accepted that the test was a mixed question of fact and law which was fact sensitive. Miss Whipple, however, considered that Respondents’ counsel placed too much emphasis in his summing up on conceptualising the link as the costs of inputs and price of outputs. Miss Whipple reminded the Tribunal that the test was about whether a particular input was used for the supply in question.  
51.	The Appellant’s primary case was that its business comprised a wide range of outputs. Key amongst these was the sale of the tickets. But the non ticket income generated by the Appellant was an integral part of its business overall, and was critical to the Appellant’s profitability. It was enough that the Appellant could show that the input in question (consideration paid to the production companies) bore a direct and immediate link not only with the ticket sales, but also with the general purpose of its business. Counsel expressed the opinion that there was an inextricable link as a matter of fact between the consideration paid to the companies and all of the Appellant’s income. That inextricable link went both ways and informed the arbitrage between the Appellant and each of the production companies with which it negotiated. 
52.	The alternative way of looking at that link was to consider the specific taxable outputs closely. Miss Whipple for the Appellant gave specific examples where in her view the types of non ticket income were integrally associated with the particular production. Programmes provided information about particular shows and were part of the cultural experience of attending a live performance as demonstrated by the Appellant’s customer survey. If the Tribunal was to conclude that there was a direct and immediate link with just one of the Appellant’s taxable supplies that was sufficient to render the consideration paid to the production companies residual input tax.
53.	 Miss Whipple concluded that the consideration paid was essential to the Appellant’s ability to generate income, of whatever sort, taxable or non-taxable. The Appellant was only able to incur this cost on the basis that these wider income generating activities took place. They formed an integral part of the Appellant’s calculations in determining whether the production could be afforded. The Appellant, therefore, contended that the requisite direct and immediate link was made out across the whole range of its taxable activity.
54.	Mr Wilken for the Respondents submitted that there was no direct and immediate link between the consideration paid to the production companies and the Appellant’s taxable supplies. First the consideration varied from production to production, whilst the costs of the taxable supplies remained static. No element of the consideration was used in providing the taxable supplies. Therefore it was not a cost component of those supplies. Second there were three sets of transactions in this Appeal, the incurring of the consideration, the purchase of the tickets and then the potential sale of taxable supplies. The sale of tickets was an exempt supply which broke the chain of transactions. Third the Appellant’s position that the consideration was an integral part of the business was not reflected in the Appellant’s Statutory Accounts where it was recorded as “cost of sales,” separate from the costs of the taxable supplies.
55.	Finally Mr Wilken contended that there were fatal flaws in the arguments presented on behalf of the Appellant. The Appellant’s submission that its business and profitability were dependent upon the taxable supplies was irrelevant because it concerned the party’s intention (BLP) and was about commercial necessity (Southern Primary). The proposition that the income generated by the taxable supplies formed part of the negotiations with the production companies was an argument for saying they were part of the cost components of the consideration paid.  Next the Appellant’s contention that the consideration was part of the Appellant’s general overheads was in Mr Wilken’s view factually incorrect because the consideration was a cost component of the specific supply of selling tickets as reflected in the Appellant’s accounts. Last the Appellant’s contention that certain taxable supplies were integrally associated with given productions was without merit because it was a statement of the “but for” test in Southern Primary.
Reasons for Our Decision on whether the Input tax on the Consideration paid by the Appellant to the Production Companies was Attributable to Exempt and Taxable supplies.
56.	The parties accepted that the consideration paid by the Appellant to the production companies was directly and immediately linked to the sale of tickets for the production, an exempt supply. The dispute concerned whether there was also a direct and immediate link between the consideration and any one of the Appellant’s taxable supplies. Our task is to apply the direct and immediate test to the facts of this case by taking account of all the circumstances and decide on the facts found whether there was a direct and immediate link between the consideration paid by the Appellant to the production companies and any one of the Appellant’s taxable supplies. Our findings of fact are set out in paragraphs 7 –35.
57.	Before analysing each of the Appellant’s transactions objectively we wish to highlight the following:
(1)	We placed weight on the Appellant’s Statutory Reports and Accounts which in our opinion provided an objective, true and fair view of the Appellant’s business. We were not impressed with the Appellant’s evidence that the Statutory Reports and Accounts were not indicative of the way the Appellant organised its business.
(2)	The bundles of documents prepared for the Tribunal did not contain copies of the contracts with the production companies. During the hearing we requested the Appellant to provide us with copies, which it did in respect of the “Miss Saigon” production. We understand from the Appellant that the structure and the detail of the respective rights and obligations of the parties in the “Miss Saigon” contract was typical of the Appellant’s contracts with production companies. The formula for calculating the respective shares of the ticket sale proceeds between the Appellant and the production companies would, however, vary from contract to contract. We placed weight on the typical structure and detail of the contract, which provided us with an objective analysis of the commercial relationship between the Appellant and the production companies. 
(3)	We took account of all the circumstances relating to each of the Appellant’s taxable supplies.
58.	  We found at paragraphs 17 and 18 that the consideration paid by the Appellant to the production companies did not form part of the general overheads of the Appellant’s business. We reached this conclusion from the fact that the consideration was recorded under the separate heading “costs of sales” not as general overheads in its Statutory Reports and Accounts from 1999 – 2004. Further the consideration paid to the companies was specific to each production, the size of which varied depending upon the nature of production. 
59.	  We now consider in turn each of the Appellant’s taxable supplies. The Appellant made taxable supplies to the production companies, which included but not limited to dry ice, cleaning or repair as a result of smoking, piano tuning, telephone/fax/photocopies, agency/credit card commissions, additional equipment, hire of plant and provision of late night transport. The analysis of the Miss Saigon contract and the evidence of the Appellant’s Chief Executive showed that these supplies were part of the costs of the production companies with the Appellant deducting them as expenses from the eventual consideration paid to the companies. These taxable supplies were used by the companies to put on their shows and part of the cost components of the production. The consideration paid was not a cost component of the Appellant’s taxable supplies to the companies. Thus we find that there was no direct and immediate link between the consideration paid and these taxable supplies.
60.	Appellant’s counsel submitted that it was difficult to see a more direct link between production inputs (the consideration paid) and the Appellant’s taxable outputs than sponsorship of a particular show by a third party. The evidence, however, adduced by the Appellant revealed that sponsorships of individual shows were in reality marketing campaigns by local radio stations (see paragraphs 30 and 31). The analysis of the evidence demonstrated that the costs of the marketing campaigns were part of the costs of production.   Thus we find that there was no direct and immediate link between the consideration paid to the production companies and the marketing campaigns.
61.	The Appellant contended that it was making taxable supplies of the production companies’ merchandise which was specific to each show and distinct from the Appellant’s merchandise. The Appellant permitted its employees to sell the companies’ merchandise within the Theatre in return for a fixed percentage of the sale proceeds which was deducted as expenses from the consideration paid. We question the Appellant’s assertion that the sale of this merchandise was one of its own taxable supplies. Rather we consider that the sale was a taxable supply of the production companies. In this instance the Appellant was acting as agent for the companies charging a commission in the form of a fixed percentage for its services. This commission was part of the companies’ costs and reflected as such in the contract for the Miss Saigon production. Thus we find that there was no direct and immediate link between the consideration paid to the production companies and the commission received by the Appellant on the sale of the production companies’ merchandise.
62.	The facts found in respect of the Appellant’s sale of programmes, drinks, confectionary, its own merchandise, corporate entertainment and sundry items (opera glasses and payphones) were as follows:
(1)	The “Miss Saigon” contract revealed that there was no relationship between the consideration paid and the Appellant’s sales of these items. The size of the consideration was determined solely by the ticket sales. We prefer the evidence of the contract to the evidence of the Chief Executive about the intentions of the negotiating parties. We consider that the contract was an objective statement of the business relationship between the Appellant and the production company. Whereas the Chief Executive’s evidence required us to consider the subjective intentions of the negotiating parties which was contrary to the decision in BLP.
(2)	The analysis of the Statutory Reports and Accounts showed that the consideration paid to the production companies did not form part of the costs of these taxable supplies by the Appellant. The costs of the taxable supplies were grouped together under “selling and marketing expenses” whereas the consideration paid was allocated to “costs of sales”.
(3)	The evidence of the Appellant’s Chief Executive confirmed that the price of these taxable supplies did not vary from production to production. The selling price for the supplies were arrived at by fixing the appropriate mark up from the costs of the materials that made up the supplies which did not include the consideration paid to the production companies together with an assessment of the market by the Appellant’s management.
(4)	The selling price of these taxable supplies was not included in the ticket price for the show. The programmes, confectionary, drinks, sundry items and merchandise were all purchased separately from the ticket for the performance. The Appellant’s evidence about the corporate entertainment was that there were two tickets, one for the entertainment and one for the performance. Also the Appellant’s documentation clearly stated that the terms and conditions of the ticket sales were different from those for the corporate entertainment. 
(5)	Patrons attending the theatre could choose whether to purchase the programmes, confectionary, drinks, sundry items and merchandise. The prior purchase of the ticket for the performance would break the link if there was one with the consideration paid by the Appellant to the production company because of the exempt nature of the supply of the ticket.
We are satisfied on the facts found when taken together that the consideration paid to the production companies was not used for the Appellant’s taxable supplies of programmes, confectionary, drinks, merchandise, sundry items and corporate entertainment. We, therefore, find that there was no direct and immediate link between the consideration paid and the Appellant’s taxable supplies of programmes, confectionary, drinks, merchandise and corporate entertainment.
63.	We found the following facts in respect of the sponsorship arrangements entered into by the Appellant:
(1)	The sponsorship income was recorded under the separate heading of “other operating income” in the Appellant’s Statutory Reports and Accounts.  The consideration paid to the production company was recorded under “cost of sales” which was not connected with “other operating income” in the Accounts 
(2)	The “Miss Saigon” contract specified   that  the Appellant would have exclusive rights over sponsorship income. Thus sponsorship formed no part of the negotiations between the Appellant and the production companies. The contract mentioned that sponsorship relating specifically to the production required the written consent of the Touring Manager of the production company. The Appellant, however, produced no evidence of sponsorship of individual shows except for the marketing campaigns with the local radio companies which we have dealt with previously. 
(3)	The Appellant’s Chief Executive confirmed that the pricing of the various sponsorship packages was arrived at independently from the consideration paid. The size of the sponsorship was determined by the extent of the advertising taken up by the sponsor together with an assessment by the Appellant’s management about what the sponsor would pay. 
(4)	There was no temporal link between the sponsorship agreements and the contract with the production companies. The Appellant could strike a sponsorship deal at any time and its duration was not fixed with reference to the productions.
We are satisfied on the facts found when taken together that the consideration paid to the production companies was not used for the Appellant’s taxable supplies of sponsorship. We, therefore, find that there was no direct and immediate link between the consideration paid to the companies and the Appellant’s taxable supplies of sponsorship.
64.	 The Appellant’s supplies of theme evenings did not fall within the time period of the Appellant’s disputed claim for input tax and outside the remit of this Appeal. We were asked by Appellant’s counsel to make a ruling on the issue of theme evenings to avoid the potential expense of future litigation. We have decided not to make a ruling because the Appellant has not produced sufficient evidence about the organisation, the costs and the contractual arrangements for these events in order for us to make findings of fact. Also any decision made by us on theme evenings would not be binding on another Tribunal and might prejudice future litigation taken by either party.
The Decision on Disputed Issue One
65.	We considered in detail each of the Appellant’s taxable transactions. Our analysis of the evidence demonstrated that the consideration paid to the production companies was not used for the Appellant’s taxable supplies. We found no direct and immediate link between the consideration paid and any one of the Appellant’s taxable supplies. We are satisfied that the consideration paid was used exclusively in making exempt supplies of ticket sales for productions. We, therefore, dismiss the appeal on the first disputed issue. 
Disputed Issue Two: Whether the Respondents are Estopped in Law from disputing the Amounts claimed by the First and Second disclosures by reason of a previous Appeal settled by consent?
66.	 This aspect of the Appeal concerned two voluntary disclosures made by the Appellant covering the VAT periods ending March 1999 to December 2001. It did not cover the period of the third voluntary disclosure from 16 December 2001 to 7 December 2002, which was considered along with the first two voluntary disclosures in disputed issue one of this Appeal. 
67.	The Appellant asserted that the previous Appeal settled by consent sanctioned the amount of VAT repayment claimed in the first two voluntary disclosures. The repayment claim included an amount of input tax calculated on the basis that the consideration paid by the Appellant to the production companies was attributable to the Appellant’s taxable and exempt supplies. The Respondents disputed the assertion saying that the Appeal was concerned solely with the issue about whether the Appellant fell within the definition of eligible body to qualify for the “cultural” exemption under Schedule 9, Group 13 of the 1994 Act.
The Facts Found
68.	On 25 April 2002 the Appellant’s representatives wrote to the Respondents submitting a repayment claim for the period ending March 1999. The claim was restricted to the repayment of output tax calculated on the basis that the ticket sales for performances were exempt supplies. On the 8 May 2002 the Respondents acknowledged receipt of the letter stating that the Department had not yet reached a policy decision on the European Court of Justice decision in the case of the Zoological Society of London.
69.	On 30 July 2002 the Appellant’s representatives submitted a second disclosure letter covering a repayment claim for the period of 1 April 1999 to 15 December 2001 which was acknowledged by the Respondents on 9 August 2002 repeating their advice in their letter of 8 May 2002. The 30 July 2002 letter was accompanied by a detailed schedule of the claim which showed not only overpayment of output tax but also input tax calculated under the standard method of the partial exemption rules.
70.	On 5 August 2002 the Appellant’s representatives requested the Respondents to give their reasons in writing for refusing the Appellant’s repayment claims. The Respondents responded on 14 August 2002 stating that the Appellant’s claim would be considered at the appropriate time. Further it was too early to consider a Tribunal because the High Court had not yet considered the facts of the London Zoo decision.
71.	On 21 August 2002 the Appellant’s representatives wrote to the Respondents advising them that there were some irregularities in the way the figures were compiled in respect of the first disclosure, namely that they had treated some of the costs as directly attributable to exempt supplies whereas they should have been treated as residual. The representatives stated that it would result in a higher claim but they did not explain which costs should have been treated as residual. The amended claim was sent with the letter. The Respondents acknowledged receipt of the letter on 28 August 2002.
72.	 On 23 September 2002 the Appellant’s representatives expressed their frustration with the Respondents regarding their delay with dealing with the repayment claims. The representatives put the Respondents on notice that they would be lodging an Appeal with the VAT and Duties Tribunal unless they heard from the Respondents within seven days. On 1 October 2002 the Respondents responded to the letter repeating that the revised policy guidance on the cultural exemption issue was still not available but in order to progress matters they requested information about specific organisational arrangements for the Appellant. The Respondents also wrote direct to the Appellants explaining the reasons for the delay in dealing with their claim.
73.	On 14 October 2002 the Appellant’s representatives submitted a Notice of Appeal to the VAT and Duties Tribunal, a copy of which was sent to the Respondents with a covering letter. 
74.	The Notice of Appeal identified the amount in dispute of £768,520 which was the same as that specified in the disclosure letters. The grounds of the Appeal were as follows:
(1)	The Appellant appeals against a decision of the Commissioners of 9 August 2002 which decision was confirmed in further letters of 14 August and 1 October 2002.
(2)	The Appellant appeals against the Commissioners’ refusal to repay sums paid by way of VAT to the Commissioners, which was not tax due to them.
(3)	The Appellant’s activity is the running of a Theatre. The claim for repayment is for VAT accounted for by the Appellant in respect of sums paid to the Appellant for a right of admission to the theatre to watch a theatrical, musical or choreographic performance of a cultural nature.
(4)	The supply of a right of admission to such events is exempted from VAT by virtue of Item 2 (a) of Schedule 9, Group 13, VATA 1994 when supplied by an eligible body.
(5)	An eligible body is defined in Note 2 of Group 13 (supra)
(6)	The Appellant fulfils the criteria set out in Note 2 of Group 13 and accordingly should not have accounted for VAT on the supplies it made of rights of admission.
(7)	The Appellant has sought repayment of sums overpaid and the Commissioners have refused in their letters of 9 and 14 August and 1 October 2002 to even consider the claim. Their refusal to consider the claim must be construed as a refusal to make payment to the Appellant of the sums overpaid and it is against that refusal the Appellant appeals.
(8)	The Appellant seek its costs incidental to and consequent upon this Appeal.
75.	 After the Notice of Appeal was lodged the parties made a series of applications to the Tribunal which were either withdrawn or agreed. The various applications referred solely to the cultural exemption matter. For example, the grounds of the Appellant’s Notice of Application on 3 January 2003 were:
“that the Respondents have had sufficient time in which to consider whether the cultural exemption applies to the Appellant’s business activities, the ECJ decision in London Zoo having been released on 21 March 2002”.
76.	On 22 January 2003 the Respondents wrote to the Appellant’s representatives advising them that they accepted that the Appellant’s supplies of the right of admission to the Theatre were exempt supplies. As a consequence of that determination the Respondents would arrange for the repayment claim as set out in the letters of 25 April 2002 and 30 July 2002 to be actioned in accordance with normal procedures. According to Mr McLaughlin of HM Revenue and Customs normal procedures would include verification of the details and composition of the claim where it was deemed appropriate to do so. The Appellant’s representatives were asked to withdraw the Appeal as the determination effectively dealt with the matters raised by the Notice of Appeal.
77.	The author of the 22 January 2003 letter was Mr Duignan, the Respondents’ Appeals and Reconsideration Officer based at Southampton. Mr Duignan sadly died early this year. We were shown an e mail from him of 24 March 2004 where he recollected that the decision to admit the Appeal of 14 October 2002 was restricted to the issue of exemption. At no stage was the question of the input tax claim considered until the meeting on 6 February 2003 when Mr Houghton and Mr Howe discovered the attribution of the input tax to both taxable and exempt supplies. 
78.	On 30 January 2003 the Appellant’s representatives applied to the Tribunal for directions, namely that the Appeal be allowed and that the Appellant be awarded costs incidental to and consequent upon the Appeal on the ground that the Respondents had withdrawn the disputed decision.
79.	 On 6 February 2003 a meeting was held at the Theatre between the parties to examine the Appellant’s claim and for the Respondents to explain the full implications of the change in status of the Appellant’s major source of income from taxable to exempt supply. Mr Howe and Mr Houghton attended the meeting from HM Revenue and Customs. At the meeting they became aware that part of the repayment claim consisted of input tax arising from the attribution of the consideration paid by the Appellant to the production companies to taxable and exempt supplies. Mr Howe and Mr Houghton advised the Appellant’s representatives that they could not accept this interpretation regarding the attribution of the consideration paid and that they would take further advice which would be communicated in due course.
80.	On 9 February 2003 Mr Houghton confirmed in writing the Respondents’ view that the consideration paid was a cost component only of the exempt supply of ticket sales.
81.	On 4 March 2003 the Respondents responded to the Appellant’s representatives regarding their application for directions of 30 January 2003. The Respondents noted that the application had been listed for the 24 March 2003 and that they would be prepared to pay the Appellant’s reasonable costs in the matter. The Appellant’s representatives in turn faxed the Tribunal on 12 March 2003 advising that the Respondents had agreed to pay the Appellant’s reasonable costs in connection with the costs hearing listed on 24 March 2003. On 14 March 2003 the Tribunal notified the Appellant’s representatives that the application for directions had been withdrawn and enquired of the representatives about their intentions to withdraw the Appeal.
82.	The Appellant’s representatives communicated with the Respondents’ solicitors by e mail on 17 March 2003 suggesting that the Respondents put in a formal application consenting to the directions that the Appeal be allowed and that reasonable costs be awarded to the Appellant.
83.	On 25 March 2003 the Appellant’s representatives responded to Mr Howe’s letter of 9 February putting forward its case for the attribution of the consideration paid to taxable and exempt supplies.
84.	On the 8 April 2003 the Appellant’s representatives submitted to the Respondents a voluntary disclosure for overpaid VAT in respect of the period from 16 December 2001 to 7 December 2002.  They made it clear in this letter that the claim had been prepared on the basis that the costs incurred by the Appellant in connection with hosting productions were attributable both to taxable and exempt supplies. On 11 April 2003 a further voluntary disclosure was submitted by the Appellant’s representatives for overpaid VAT in respect of the period 1 January 1990 to December 1998.
85.	On the 19 May 2003 the Appellant’s representatives e mailed a draft notice of application to the Respondents’ solicitors with the request that they sign and date the notice and lodge it with the Tribunal. The draft notice stated that
“TAKE NOTICE that the Respondents hereby CONSENT to the Appellant’s application of 30 January 2003 that the Appeal be allowed with costs”.
86.	On 21 May 2003 the Respondents wrote to the Appellant and its representatives in response to the letter of 25 March 2003 confirming their decision that the consideration paid was a cost component only of the exempt supplies.
87.	On 2 June 2003 the Appellant’s representatives reminded the Respondents’ solicitors about consenting to the draft application of 19 May 2003. On 10 June the draft consent application was signed by Mr Quesnel, solicitor for the Respondents and forwarded to the Tribunal which received it on 11 June 2003. The Tribunal notified the parties that the application would be listed before the Tribunal on 17 July 2003. On 16 June the Appellant’s representatives advised the Tribunal to vacate the hearing on 17 July as the parties were in agreement.
88.	On 2 July 2003 the Respondents requested the Appellant’s representatives to provide details of the Appellant’s sponsorship income which was supplied on 18 July 2003.
89.	On the 18 July 2003 the Appellant’s representatives wrote to the Respondents’ solicitors pointing out that on 22 January 2003 the Respondents withdrew the disputed decision which was the subject of the 14 October 2002 Appeal but were now seeking to challenge the Appellants on another front, namely that the consideration paid was attributable solely to exempt supplies. The Appellant’s representatives expressed the view that their clients were being subjected to a second challenge on a claim that had already been the subject of an Appeal. They were of the view that the Respondents were estopped from raising this matter by virtue of the principle of res judicta.
90.	On 24 September 2003 the Appellant’s representatives contacted the Tribunal to enquire about the direction allowing the 14 October 2002 Appeal with costs. The Tribunal informed the representatives that the direction had not been stamped which would be done straightway and faxed to them.  The stamp was in the name of the “Proper Officer” and recited the words “By consent this application is allowed”. There followed a series of correspondence between the parties and the Tribunal about the costs order.
91.	On 23 March 2004 the Appellant’s representatives advised the Tribunal that the issue of costs had been settled. Further the representatives requested the Tribunal to treat the Appeal as being allowed and ensure that all correspondence relating to the Appeal reflected this position, in no way should the Appeal be treated as withdrawn.
92.	The initial correspondence up and until the lodging of the Notice of Appeal on 14 October 2002 was conducted between the Senior VAT Manager for Deloitte and Touche, Southampton (the Appellant’s representatives) and the Business Assurance section of the Respondents’ Southampton Office. On 14 October another line of communication was opened up between the VAT Manager for Deloitte Touche (London) and the Respondents’ solicitors office in London to deal with the Appeal before the Tribunal.  The Appeals Officer at the Respondents’ Southampton office also became involved in conducting local reconsiderations arising from the correspondence between the Senior VAT Manager for Deloitte and Touche, Southampton and the Respondents Business Assurance section. The Appeals Officer was advised by the Respondents’ policy section in London. Thus from the 14 October 2002 there were two offices of Deloitte and Touche and four separate areas of the Respondents’ organisation dealing with the Appellant’s claim.  
93.	Mr Mclaughlin who succeeded Mr Duignan as Appeals and Reconsideration Officer at Southampton in December 2003 explained that the Respondents’ solicitors would have made the decision about the consent order in relation to the 14 October 2002 Appeal. They would have the full file including all the disclosure letters when making that decision. Mr Mclaughlin stated in cross-examination that he would have been put on notice by the large repayment claim from the Appellants. Further he would be able to infer from the Appellant’s letter of 21 August 2002 the reason why the input tax was changed from exempt to residual. He accepted that the Appellant’s letter of 8 April 2003 was explicit about the attribution of the costs to taxable and exempt supplies. 
Submissions of the Parties
94.	Miss Whipple for the Appellants contended that the Respondents compromised the 14 October 2002 Appeal without reservation and in clear terms by signing the consent order of 10 June 2003. In her view, the Appeal resolved the repayment claims of the Appellant in its voluntary disclosures of 25 April 2002 as amended on 21 August 2002 and 30 July 2002. The repayment claims incorporated residual input tax calculated on the basis that the consideration paid to production companies was attributable to both taxable and exempt supplies.  Thus in the current Appeal the Respondents were precluded from raising arguments going to the validity of the  voluntary disclosures because they had been determined by the consent order. Miss Whipple submitted that the effect of a dismissal of proceedings operated in the same way as a dismissal by adjudication, namely that the cause of action or defence died with the dismissal – the principle of res judicta applied (see The Ardandhu (1887) 12 App Cas 256).
95.	Section 85 of the 1994 Act provides that VAT Appeals settled by agreement will have the same consequences as if the Tribunal had determined the Appeal in accordance with the terms of the agreement. Miss Whipple was firmly of the view that the consent order signed by the Respondents amounted to a section 85 agreement. Failing that the consent order was nonetheless a contract between the parties which estopped the Respondents from challenging the residual treatment of the production inputs. The issue to be determined was not whether there was an agreement but the scope of that agreement, namely whether it was restricted to the exemption of ticket sales from VAT or whether the voluntary disclosures were valid. The test in law to determine the scope of the agreement was what objectively had been agreed (see I.C.S ltd v West Bromwich B.S [1998] WLR 899 – 918 (HL) and Scorer v Olin Energy Systems Ltd [1985] 2 All ER 375 (HL) for section 54 agreements for direct taxes). 
96.	Miss Whipple applied the objective approach to the consent order signed by Mr Quesnel on behalf of the Respondents. She postulated that when he signed the order he would have in his possession, the Notice of Appeal, the decisions letters and the voluntary disclosures which were the essential documents defining the parameters of the Appeal. Those documents made it plain that the Appellant was treating the consideration paid as residual input tax. Mr Quesnel knew or ought to have known what the Appellant was claiming. Applying the objective test a  reasonable man would have concluded from the surrounding circumstances including all the material known to be in the possession of Mr Quesnel that he had accepted the Appellant’s repayment claim incorporating residual input tax.
97.	Mr Wilken for the Respondents contended that the Appellant’s submissions were flawed in law and in fact. The doctrine of res judicta was not applicable in this instance because there had been no reasoned judgment of the Tribunal (Dattani v Trio Supermarkets Ltd [1998] ICR 872 at 884). Further there was authority for the proposition that res judicta did not apply to taxing authorities because of their statutory duty to collect tax ( Society of Medical Officers of Health v Hope [1960] AC 551 at 568 and Spencer Bower on Res Judicta). Mr Wilken considered that the Appellant’s submission relied on the principle of merger, that is the cause of action merges in the final judgment of the court (Republic of India v India Steamship [1993] AC 410 at 417). According to Mr Wilken merger did not apply because there was no final judgment and no cause of action in the strict sense of the phrase.
98.	Mr Wilken was also of the view that the consent order signed by Mr Quesnel did not amount to a section 85 agreement. All that occurred was that the Respondents consented to the 14 October 2002 Appeal being allowed which was neither an agreement nor an agreement of the type envisaged by section 85. In any event the facts showed that the consent order only embraced the issue of exempt sale of ticket sales. The treatment of the consideration paid as residual input tax arose at the meeting between the parties on the 6 February 2003 which was after the Respondents’ decision to concede the Appeal on 22 January 2003.  The reasonable man would have concluded from all of the surrounding circumstances that residual input tax formed no part of the dispute between the parties in the 12 October 2002 Appeal.
Reasons for Our Decision
99.	The jurisdiction of the VAT and Duties Tribunal is limited by statute. The Tribunal has no supervisory jurisdiction to determine whether a contract was formed between the parties outside a section 85 agreement or whether the Respondents were estopped from taking action by the terms of that wider contract (see The Commissioners of Customs and Excise v McNulty Offshore Services [1996] VAT Decision Number 14824). 
100.	Under the second disputed issue we are, therefore, considering the legal effect of the Respondents consenting to the Appellant’s application of 30 January 2003 that the 12 October 2002 Appeal be allowed with costs upon our jurisdiction to determine the first matter in dispute for the VAT periods ending March 1999 to December 2001, which require us to determine the following questions:
(1)	Was the 12 October 2002 Appeal disposed of by agreement under section 85 of  1994 Act?  And if yes
(2)	Did the terms of that section 85 agreement prevent us from deciding whether the input tax arising from the consideration paid to the production companies was attributable exclusively to exempt supplies or to both taxable and exempt supplies for the period covered by the Appellant’s first two voluntary disclosures?
101.	Section 85(1) of the 1994 Act provides that
“Subject to the provisions of this section, where a person gives notice of appeal under section 83 and before the appeal is determined by a tribunal, the Commissioners and the appellant come to an agreement (whether in writing or otherwise) under the terms of which the decision under appeal is to be treated
a)	as upheld without variation, or
b)	as varied in a particular manner, or
c)	as discharged or cancelled,
the like consequences shall ensue for all purposes as would have ensued if, at the time when the agreement was come to, a tribunal had determined the appeal in accordance with the terms of the agreement (including any terms as to costs).
102.	On 14 October 2002 the Appellant lodged a Notice of Appeal with the Tribunal. It is common ground between the parties that the Appeal was disposed of. The options for dealing with an Appeal are limited to:
(1)	The Tribunal has decided the Appeal on its merits.
(2)	 The Tribunal has struck out or dismissed the Appeal under rule 18 of the Tribunal Rules 1986.
(3)	The Appellant withdraws the Appeal.
(4)	The Respondents concede the Appeal.
(5)	The parties come to an agreement under section 85.
103.	 The consent order signed by Mr Quesnel from the Respondents’ solicitors on the 10 June 2003 disposed of the Appeal. There was no Tribunal hearing to determine the outcome of the Appeal. The Proper Officer of the Tribunal under Registrar powers (rule 33(1) of 1986 Tribunal Rules) ratified the consent order. Registrar powers can only be exercised if the parties were in agreement. The wording of the consent order  was “take notice that the Respondents hereby consent to the Appellant’s application of 30 January 2003 that the Appeal be allowed with costs” . These facts when taken together suggest to us that the 14 October 2002 Appeal was disposed of under section 85. None of the other disposal categories fit the circumstances. The chronology set out in the facts found revealed that the Appellant resisted all attempts to withdraw the Appeal. Likewise the Respondents did not unilaterally concede the Appeal.
104.	Mr Wilken’s arguments, however, were more subtle than trying to fit a set of circumstances into the most appropriate disposal category. He said that applying a proper contractual analysis, the consent order did not amount to an agreement. We disagree. On 22 January 2003 the Respondents offered the Appellant the opportunity to withdraw the Appeal as the disputed matter had been determined. The Appellant countered by suggesting that the Respondents consent to an order allowing the Appeal with costs, to which the Respondents agreed. The Appellant enjoyed the benefit of the Appeal in its favour and an award of the costs. Conversely the Respondents suffered the detriment of costs and the Appeal being allowed. The consent order created legal relations and was set out in a form which complied with Tribunal procedures. The terms of the consent order were certain, namely the Appeal be allowed with costs. The fact that there is now a dispute about the precise scope of the term, “appeal be allowed” is an issue of construction of the agreement rather than a fatal flaw denying the existence of an agreement. 
105.	Mr Wilken further submitted that if there was an agreement it was not of a type envisaged by section 85 of the 1994 Act. The requirements of that section are as follows:
(1)	A Notice of Appeal is given under section 83 of the 1994 Act.
(2)	Before the Appeal is determined by the Tribunal the parties come to an agreement.
(3)	The agreement can be in writing or otherwise.
(4)	Under the terms of the agreement the decision under Appeal is upheld without variation or varied in a particular manner or discharged or cancelled.
We are satisfied that the consent order of 10 June 2003 met the above requirements of section 85. We, therefore, find that the consent order of 10 June 2003 represented an agreement under section 85 between the Appellant and the Respondents which had the effect of allowing the 12 October 2002 Appeal with costs. 
106.	The parties disagreed about the date of the agreement. Miss Whipple for the Appellant suggested that the Appeal was concluded when it was withdrawn from the Tribunal’s review by the consent order of 10 June 2003. Mr Wilken, on the other hand, proposed that the Appeal was concluded when the exemption issue was resolved by the Respondents’ letter of 22 January 2003. We find that the date of the agreement is the 10 June 2003 when Mr Quesnel signed the consent order because it was only then that the parties formed binding legal relations. The Respondents’ letter of 22 January 2003 was merely an invitation to settle requesting the Appellant to withdraw its Notice of Appeal. 
107.	The legal effect of a section 85 agreement is that it would have the same consequences as if a Tribunal had reached the conclusion as set out in the agreement. Thus the Tribunal becomes functus officio on the issues resolved by the agreement and a subsequent Tribunal cannot adjudicate on those same issues.  
108.	The substantive dispute between the parties was the scope of the agreement. The Appellant argued that it dealt with the two issues of exemption and residual input tax. The Respondents contended that it was restricted to the sole issue of exemption. Following the rules of construction our starting point is to consider the agreement itself, which states that, the “Appeal be allowed with costs”. We cannot construe from those words alone the parties’ common intentions about what dispute they were trying to resolve. In those circumstances we are entitled to consider evidence of the parties’ negotiations and other extrinsic evidence to determine the parties’ intentions.  
109.	We rely on passages from Mr Fosset’s book on “The Law and Practice of Compromise” quoted in Dattani v Trio Supermarkets at 882 as authority for referring to extrinsic evidence:
“Subsequent to the conclusion of a compromise, questions may arise as to its meaning and effects. This can occur even when those with the highest calibre of legal expertise have been responsible for the drafting of the agreement. The task is to determine the common intention of the parties by construing the agreement. If an agreement has been reduced to writing whether purely as a written contract or as an agreement embodied in a consent order or judgment, the intention of the parties must be construed by reference to the document or order itself: extrinsic evidence of what may or may not have been in the minds of the parties is not admissible”.
“However, although evidence of the parties negotiations is normally inadmissible, for the purpose of construing their agreement, it may be admissible: a) to explain the meaning to be attached to an ambiguous word or expression and b) along with other extrinsic evidence to show the disputes which the parties, by their agreement were endeavouring to resolve”.
110.	Mr Wilken proposed that just the Notice of Appeal should be considered to decipher the intentions of the parties. Miss Whipple expanded the list of documents to include the Respondents’ decision letters and the voluntary disclosures, which in her view, were the essential documents setting out the parameters of the Appeal. We consider that the various Notices of Application leading up to the consent order should be added to Miss Whipple’s list to provide the complete set of pleadings for the Appeal.
111.	Our examination of the voluntary disclosures, the disputed decisions, the Notice of Appeal and the subsequent applications revealed that the dispute between the parties related exclusively to the exempt status of the ticket sales (the cultural exemption issue). None of the documents explicitly mentioned that production costs (consideration paid) were attributable to both taxable and exempt supplies. The Appellant’s letter of 21 August 2002 referred to a mistake in the early calculations, in that the Appellant “treated some of the costs as directly attributable to exempt supplies, whereas they should have been treated as residual”.  However, that statement did not specify the reason for the mistake or identify what costs had been treated as residual. The only dispute given prominence in these documents was the cultural exemption issue. We are satisfied that a reasonable person having all the background information which would have been reasonably available to the parties when making the section 85 agreement would have concluded that the 12 October 2002 Appeal resolved the cultural exemption issue alone. The reasonable person would not have turned his attention to the amount claimed or that the consideration paid by the Appellant to the production companies was residual input tax. We find that the section 85 agreement settling the 12 October 2002 Appeal did not resolve the issue of whether the consideration paid to the production companies was attributable to both taxable and exempt supplies. Therefore, we had jurisdiction to determine the attribution of the input tax arising from the consideration paid for the periods covered by the Appellant’s first two voluntary disclosures. We dismiss the Appellant’s Appeal on the second disputed issue.
112.	We requested additional submissions on the relationship between section 85 of the 1994 Act and the jurisprudence attached to section 54 of the Taxes Management Act 1970. After considering those submissions we decided to determine the second issue in dispute by an application of the principles underpinning agreements, which was the primary submission of both parties. However, it did appear to us that those same principles were applied in the leading case on section 54: Scorer (Inspector of Taxes) v Olin Energy Systems Ltd  [1985] 2 All ER 375 (HL)
113.	We note that the litigation of the second matter in dispute could have been avoided if greater care had been taken in the first place with drafting the section 85 agreement.
114.	We, therefore, dismiss the appeal. We make no order for costs. We express our appreciation of the competent way in which the Advocates dealt with the Appeal and their speed in dealing with the supplemental matters arising from the hearing. 

MICHAEL TILDESLEY

CHAIRMAN
RELEASE DATE: 26 August 2005

LON/03/583