Neutral Citation Number: [2006] EWCA Civ 116
Case No: C3/2006/1018
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT, QBD
MR JUSTICE HART
CH/2005/APP/0729
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 22/02/2007
Before :

LORD JUSTICE AULD
LORD JUSTICE CHADWICK
and
LORD JUSTICE CARNWATH
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Between :

	COMMISSIONERS OF HER MAJESTY'S REVENUE & CUSTOMS	Appellant	
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	MAYFLOWER THEATRE TRUST LTD	Respondent	

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Melanie Hall QC & Eleni Mitrophanous (instructed by HMRC Tax & Excise Litigation) for the Appellant
D. Milne QC & Philippa Whipple (instructed by Forbes Hall) for the Respondent

Hearing dates : 22 – 24 January, 2007
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Judgment
Lord Justice Carnwath: 
Introduction
1.	The Mayflower Theatre in Southampton was built in 1928. The theatre is the fourth largest in the country with a seating capacity in excess of 2,200. Between 1942 and 1982 it was run as a cinema. In 1982 there were proposals to turn it into a bingo hall, but after a public outcry the City Council intervened and bought the theatre. It granted a 125 year lease to the Mayflower Theatre Trust (“the Trust”), an independent charitable trust established for the purpose. Its objects include the maintenance of the theatre, and the support of drama, dance, opera and the arts generally. The Trust is a company registered for VAT, as part of a group registration with its wholly owned subsidiary trading company, Mayflower Enterprises Ltd. 
2.	The theatre draws its audience from the entire southern region of the United Kingdom. Its programme of productions includes ballet, opera, drama, musicals, comedy, pantomime and rock and pop performances. It sells tickets for the productions either through its own box office or through a ticketing agency. The Trust does not produce its own performances, but buys in performances from production companies under separate production contracts. The contracts regulate the respective responsibilities of the Trust and the production companies. A production contract dated 23rd September 2003 with Cameron Mackintosh Ltd (described as “touring manager”) for “Miss Saigon” was accepted by the tribunal as typical, although falling outside the relevant periods. The tribunal summarised the normal financial arrangements under such contracts (para 13):
“The (Trust) 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 (Trust) 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.”  
3.	This appeal concerns the calculation of value added tax for the VAT periods ended March 1999 to December 2002. At stake is £679,694 of input tax, which the Trust claims it should have been entitled to deduct for those periods. This follows the decision of the European Court of Justice in Customs and Excise Commissioners v The Zoological Society of London [2002] STC 521, relating to the cultural exemption from VAT under the relevant directive. In the light of that decision, HMRC accepted that the Trust was within the terms of the cultural exemption, and that accordingly the supply of tickets for performances should have been treated as exempt from VAT. VAT charged on these supplies has been repaid. The Trust claimed that it was entitled to a further repayment, representing a proportion of the input tax it could have deducted in respect of the consideration paid to production companies. This was based on the contention that, under the “partial exemption” rules (see below), the input tax was not attributable exclusively to the exempt supplies of theatre tickets, but also in part to taxable supplies of various types.
VAT principles  
4.	The basic principles of VAT law are well-known and do not need elaboration in this judgment. The starting point is Article 2 of the First Directive (67/227/EEC), which established the general features of the tax:
“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.”
5.	Rules for deduction of input tax are found in articles 17 and 19 of the Sixth Directive (77/388/EEC). Article 17(2) gives a taxable person the right to deduct input tax “in so far as the goods and services are used for the purposes of his taxable transactions”. Where the inputs are used for both taxable and exempt supplies, Article 17(5) allows the deduction of “only such proportion of the value added… as is attributable to” the taxable supplies. Article 19 provides a method for calculating the proportion to be deducted, by applying a fraction of taxable turnover over all turnover. Article 17(5) permits other methods to be applied by domestic law in particular circumstances.
6.	These articles are given effect in this country by the VAT Regulations 1995 (SI 1995/2518) (made under section 26 of the VAT Act 1994). Regulation 101(2) provides that
a)	…
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. (emphasis added)
The rules governing cases falling under paragraph (d) are known as the “partial exemption rules”. (It is not suggested that, for the purposes of this appeal, there is any material difference between the Directive and the Regulations.) 
7.	The method prescribed by paragraph (d) mirrors Article 19, and is normally referred to as “the standard method”. It applies except where a different “special” method is agreed, or directed by HMRC. For the periods in question in this case (before the law had been clarified by the Zoological Society case) no alternative method had been directed. Although there is now some provision for retrospective adjustment, that does not apply to periods before April 2002 (reg 107A-E). 
8.	We have been referred to numerous cases on the application of these rules. At the European level the most significant are BLP Group plc v CCE [1995] STC 424; Card Protection Plan Ltd v CCE [1999] 2 AC 601; Midland Bank plc v CCE [2000] STC 501; Abbey National plc v CCE [2001] STC 297; and Kretztechnik AG v Finanzamt Linz [2005] 1 WLR 3755. We have been much helped by the fact that these cases have been authoritatively reviewed in two recent cases in this court: CCE v Southern Primary Housing Association Ltd [2003] EWCA Civ 1662, [2004] STC 209; and Dial-a-Phone Ltd v. CCE [2004] EWCA Civ 603, [2004] STC 987. Two recent decisions in the House of Lords are also relevant: Beynon v CCE [2004] UKHL 53; and College of Estate Management v CCE [2005] UKHL 62.
9.	The main principles derived from these cases are not controversial. They were helpfully summarised in Miss Whipple’s first skeleton for the Trust dated 1st August 2006 (subsequently adopted by Mr David Milne QC). I will refer to this as “the Trust’s skeleton”.) I extract (with minor adaptations) the following points:
i)	Input tax is directly attributable to a given output if it has a “direct and immediate link” with that output (referred to as “the BLP test”).  
ii)	That test has been formulated in different ways over the years, for example: whether the input is a “cost component” of the output; or whether the input is “essential” to the particular output.  Such formulations are the same in substance as the “direct and immediate link” test. 
iii)	The application of the BLP test is a matter of objective analysis as to how particular inputs are used and is not dependent upon establishing what is the ultimate aim pursued by the taxable person.  It requires more than mere commercial links between transactions, or a “but for” approach.  
iv)	The test is not one of identifying what is the transaction with which the input has the most direct and immediate link, but whether there is a sufficiently direct and immediate link with a taxable economic activity.
v)	The test is one of mixed fact and law, and is therefore amenable to review in the higher courts, albeit the test is fact sensitive. 
10.	Point (v) needs to be read in the light of what was said by the House of Lords in Beynon (per Lord Hoffmann):
“The courts have not treated VAT classification in the same way as some questions of classification (for example, whether a contract is of service or for services) which, notwithstanding that there are no facts in dispute, are deemed to be questions of fact so as to exclude on appeal on a question of law: see the discussion in Moyna v Secretary of State for Works and Pensions [2003] UKHL 44; [2003] 1 WLR 1929, 1935, paras 22-25. On the other hand, as Lord Hope of Craighead said in the British Telecommunications Plc case, at p 1386, the question is one of fact and degree, taking account of all the circumstances. In such cases it is customary for an appellate court to show some circumspection before interfering with the decision of the tribunal merely because it would have put the case on the other side of the line.” (para 27) 
11.	To that list I would add two further points, relied on by Miss Hall, again uncontroversial in principle:
vi)	It may be necessary to determine whether, for tax purposes, a number of supplies are to be treated as elements in some over-arching single supply. If so, that supply should not be artificially split: 
“The criterion is whether there is a single supply from an economic point of view. The answer will be found by ascertaining the essential features of the transaction under which the taxable person is operating when supplying the consumer, regarded as a typical consumer.” (College of Estate Management para 12, per Lord Walker)
vii)	A transaction which is exempt from VAT will “break the chain” of attribution. In the words of the Advocate-General (Jacobs) in Abbey National (para 35):
“.. the ‘chain-breaking’ effect which is an inherent feature of an exempt transaction will always prevent VAT incurred on supplies used for such a transaction from being deductible from VAT to be paid on a subsequent output supply of which the exempt transaction forms a cost component. The need for a 'direct and immediate link' thus does not refer exclusively to the very next link in the chain but serves to exclude situations where the chain has been broken by an exempt supply.” 
Dial-a-Phone 
12.	The judge relied particularly on the decision of this court in Dial-a-Phone. It provides a useful illustration of the application of these principles, and is also the closest to the present in terms of the issue before the court, though on very different facts. 
13.	The taxpayer had marketed mobile telephones with a “free” three month period of insurance.  Its earnings were partly commissions from network service providers and partly commissions from the underwriter of the insurance. In the latter respect it was acting as an insurance intermediary and thus making an exempt supply.  The issue was whether input tax payable in respect of its marketing and advertising costs was exclusively attributable to its taxable outputs (as the taxpayer contended), or was to be treated as used both for the taxable supplies and the exempt supplies. The tribunal found that the advertising and marketing costs related to both supplies.  This finding was upheld by this court.
14.	In the course of his judgment Jonathan Parker LJ reviewed the European and domestic case-law. It is of interest to note his reference (without adverse comment) to a decision of the VAT Tribunal which also has some parallels to the present case: Royal Agricultural College v. Customs & Excise Commissioners (decision no. 17508, unreported, 11 January 2002). In that case, the College contended that marketing expenditure which was primarily aimed at attracting students had a “direct and immediate link” not only with its (exempt) supply of educational services, but also with its (taxable) supplies in providing conference facilities and in selling goods in its shop and bar. The VAT Tribunal rejected that contention, saying (in paragraph 42 of its decision): 
"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 …"
15.	In Dial-a-Phone itself the tribunal had found:
“49. The arrangement of insurance is not ancillary to the advertising. Free insurance is not used merely to attract customers to sign air time service contracts for the phones. It is clearly intended to attract new customers to Cornhill Insurance as well and the appellants have a direct financial interest in customers staying with Cornhill on completion of the three free months. It is for that reason that the appellant not the phone service providers are funding a proportion of the free three month insurance with Cornhill….
51. The advertisements relate both to the appellant's intermediary service introducing customers to mobile phone air time providers and to their insurance intermediary service introducing customers to insurance business with Cornhill...”
16.	Jonathan Parker LJ concluded that these findings were unchallengeable in law:
“Thus, in my judgment, the findings of the Tribunal in paragraph 49 of the Decision and in the first sentence of paragraph 51 of the Decision… seem to me to amount to no more than the drawing of well-nigh irresistible inferences from the undisputed facts. At all events, I can see no basis for challenging those findings on appeal. In particular, I reject Mr Anderson's submission, relying on Southern Primary  that it is somehow implicit in those findings that the Tribunal applied a 'but for' test. I can detect no sign that it did so. Nor, in my judgment, did the Tribunal fall into the error (see Midland Bank) of looking beyond the 'purposes' of the particular transactions in question and having regard to some 'ultimate aim' on the part of DaP. As I read the Decision, the Tribunal's approach to the application of the BLP test was entirely in accordance with the correct principles, as enunciated by the ECJ in BLP itself and in Midland Bank.” (para 73)
The items in dispute 
17.	In simple terms the issue in this case is how the services provided by the production companies under the production contracts (“the production services”) are to be “attributed” under regulation 101. Were they “used exclusively” in making exempt ticket sales (within paragraph (c)), or were they used partly for at least some taxable supplies, so as to bring the case within paragraph (d)? 
18.	The judgment below (para 23) contains a convenient list of the different types of taxable supply made by the Trust:
i)	programme sales (zero-rated for VAT purposes);
ii)	sale of confectionery and drinks (standard rated for VAT purposes);
iii)	sale of the appellant’s own merchandise (standard rated);
iv)	a percentage commission on the sale of the production company’s merchandise (standard rated);
v)	corporate entertainment under which the corporate could buy the right to a range of eating opportunities coupled with the right to see the show…;  
vi)	supplies of sponsorship (standard rated);  
vii)	supplies to the production companies of items such as dry ice, cleaning or repair as a result of smoking, piano-tuning, telephone/fax/photocopying services, agency/credit card commissions, hire of plant and provision of late night transport;  
viii)	supply of opera glasses and payphone facilities to patrons under arrangements whereby the sale proceeds were split between the appellant and the provider.
19.	In this court, the Trust’s case rested principally on items (i), (iv) and (vi). As I understood the argument, it was not suggested that the other items in themselves would bring the case within the partial exemption rules. However, it is common ground that, if the Trust succeeds on any one of the items (or even a part of one item), the calculation under the “standard method” will be the same. It will then be entitled to bring into account all its taxable supplies (regardless of attribution) in calculating the tax deduction. Further, for periods before April 2002, HMRC would have no power to direct an alternative method of apportionment.
20.	The practical results may seem surprising at first sight. Although the figures were not referred to by the tribunal or the judge, we were shown a schedule giving the breakdown of taxable supplies for the relevant periods. The amounts under the different items vary substantially. The following figures, taking the approximate totals over the whole period from March 1999 to December 2002, give an indication of the relative scales of the items in Hart J’s list. The total taxable supplies for that period amount to a little over £6m. The largest components by far are (ii) (confectionery and drinks – about £3m) and (vii) (supplies to production companies - £2.6m). Item (vi) (sponsorship - £23,000) is much smaller; complimentary tickets offered to sponsors, on which the Trust succeeded before the judge (see below), would have been only part of that figure. Item (i) (programme sales - £87,000) is also a relatively small part of the overall picture. However, it is common ground that success on even one of the smaller items is enough under the standard method to bring in all the taxable supplies. This may seem like the tail wagging the dog. But, as Mr Milne points out, this apparent anomaly should not cloud our interpretation of the law, since it arises from the peculiar circumstances of this case and the retrospective nature of the exercise. In a normal case, HMRC would be able for the future to direct a different method, under which the calculation of the tax deduction better reflects the realities of attribution.
The Trust’s case
21.	The Trust’s case was argued under three heads, as summarised in its skeleton:
i)	The production inputs bear a direct and immediate link with Mayflower’s business as a whole, so that they are properly to be classed as “overheads” (the “overhead analysis”);
ii)	Alternatively, the production inputs bear a direct and immediate link not only with the exempt ticket sales but with one or more specific taxable output(s).  That being so, the input tax on those outputs falls to be treated as “residual” (the “specific attribution analysis”).  
iii)	One example of the specific attribution analysis is the “taxable tickets analysis” (which in substance formed the basis on which Hart J allowed the appeal – see below).  “Taxable tickets” is used in the skeleton to describe “the various packages of benefits and rights sold by Mayflower, each of which includes tickets (i.e. the right to see a performance) as an element, alongside other elements, the whole package being taxed as a single composite supply at the standard rate”.
22.	The case comes to us as an appeal from Hart J’s judgment, in which he accepted the taxable tickets analysis, and found no need to reach a conclusion on the other points. They have been raised by a respondent’s notice. The presentation of the arguments before us followed the same order, with Miss Hall for HMRC opening on the narrow taxable tickets issue, and only returning to the broader issues at a later stage. In my view, this order of presentation, though understandable, has tended to distort and complicate the issues. The order in the Trust’s skeleton is more natural, and I propose to follow it. 
The overheads analysis 
23.	I say at once that the “overheads analysis” is, in my view, inapplicable to the facts of the present case. The Trust’s argument depends on an interpretation of the concept which is not supported by the ECJ jurisprudence and seems to me wrong in principle.
24.	To understand the analysis it is necessary to explain two expressions, which are not found in the legislation, but are well-established among practitioners: “residual” input tax and “overheads”. The first is explained by HMRC notice 706, which provides a helpful guide to the rules for “partial exemption”. According to the notice, it describes input tax which falls within paragraph (d), because it is not exclusively attributable to either taxable or exempt supplies. In that sense, “residual input tax” is contrasted with “directly attributed” input tax. 
25.	The “Glossary” gives this definition (para 13): 
 “Residual input tax”: Input tax incurred by a business on goods and services used or to be used in making both taxable and exempt supplies. This input tax is apportioned between taxable and exempt supplies by the partial exemption method…  Residual input tax is commonly referred to as ‘non-attributable input tax’ or ‘the pot’. (para 13)
An earlier reference in the Notice is has a slightly different emphasis: 
“Residual input tax is VAT that cannot be directly attributed to either taxable supplies or to exempt supplies, because it relates to both, for example, telephone bills and accountancy fees. It is also known as 'non-attributable' input tax” (para 3.6)
26.	Those definitions may be open to the criticism that they conflate two different concepts. Input tax on services may fall within the partial exemption rules, first, where it has a direct link, and is therefore attributable, to both taxable and exempt supplies; or, secondly, where it has a direct link to neither, in other words it is “non-attributable”. Both may be described as “residual”. The second category, also well-established in the case-law, appears to be more usually (and more helpfully) described by the term “overheads”. 
27.	The term “overheads” is not in fact used by the VAT notice, but again is in common use by practitioners. The Trust’s skeleton describes the term as “commonly understood in VAT matters as meaning an expense not directly attributable to any specific output but rather to the business as a whole”. An authoritative explanation of the term, with examples, was given by Lord Millett (CCE v Redrow Group plc [1999] 1 WLR 408, 416F). Commenting on article 17(5) of the Directive,  he said:
“These provisions entitle a taxpayer who makes both taxable and exempt supplies in the course of his business to obtain a credit for an appropriate proportion of the input tax on his overheads. These are the costs of goods and services which are properly incurred in the course of his business but which cannot be linked with any goods or services supplied by the taxpayer to his customers. Audit and legal fees and the cost of the office carpet are obvious examples.” (emphasis added)
That explanation points to an apparent conflict with the need, under the BLP test, for a “direct and immediate” link with a particular supply. Indeed, the European judgments show some tension between the formulaic repetition of the “direct and immediate” test and the practical need to accommodate “overheads”, even though not directly linked with any particular supplies. 
28.	Help in this respect is provided by two of the cases cited to us. In Abbey National, the taxpayer carried out a sale transaction which, because it amounted to a transfer as a going concern, was not a “supply” for VAT purposes.  It incurred input tax on professional fees for services incurred directly in connection with the sale and sought to deduct that tax in its entirety.  In the course of its judgment the court explained how the fees, although not directly linked to a taxable supply, could be taken into account as “overheads” of the business as whole, or of a distinct part of the business. It was recognised that the various services acquired to effect the transfer did not have “a direct and immediate link with one or more output transactions” for the purpose of the deduction rules (para 34), but the judgment continued:
“35. However, the costs of those services form part of the taxable person’s overheads, and as such are cost components of the products of a business.  Even in the case of a transfer of a totality of assets, where the taxable person no longer effects transactions after using those services, their costs must be regarded as part of the economic activity of the business as a whole before the transfer.  Any other interpretation of art 17 of the Sixth Directive would be contrary to the principle that the VAT system must be completely neutral as regards the tax burden on all the economic activities of a business provided that they are themselves subject to VAT, and would make the economic operator liable to pay VAT in the context of his economic activity without giving him the possibility of deducting it…  
36. Thus in principle the various services used by the transferor for the purposes of the transfer of a totality of assets or part thereof have a direct and immediate link with the whole economic activity of that taxable person….” (emphasis added)
Thus, in relation to “overheads” which cannot be attributed to particular supplies, it is enough to establish the appropriate link with the “whole economic activity” of the taxable person. This apparent exception to the ordinary rule seems to be justified by the need to ensure that the VAT system is “completely neutral”. 
29.	The same point is made in the most recent of the cases cited to us, Kretztechnik. In that case it was decided that a share issue leading to a listing was not a “supply” for VAT purposes. The question then arose whether VAT paid on services received in connection with the issue was deductible. It was argued for the company (supported by the UK Government) that those inputs could be regarded as “part of the overheads of the company” and thus “components of the price of the products marketed by it” (para 32). The court accepted this argument:
“34. The deduction system is meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities. The common system of VAT consequently ensures complete neutrality of taxation of all economic activities, whatever their purpose or results, provided that they are themselves subject in principle to VAT…
35. It is clear from the last-mentioned condition that, for VAT to be deductible, the input transactions must have a direct and immediate link with the output transactions giving rise to a right of deduction. Thus, the right to deduct VAT charged on the acquisition of input goods or services presupposes that the expenditure incurred in acquiring them was a component of the cost of the output transactions that gave rise to the right to deduct…
36. In this case, in view of the fact that, first, a share issue is an operation not falling within the scope of the Sixth Directive and, second, that operation was carried out by Kretztechnik in order to increase its capital for the benefit of its economic activity in general, it must be considered that the costs of the supplies acquired by that company in connection with the operation concerned form part of its overheads and are therefore, as such, component parts of the price of its products. Those supplies have a direct and immediate link with the whole economic activity of the taxable person…” (emphasis added)
30.	One of the cases cited in support of those propositions was Cibo Participations v Directeur Regionale [2001] ECR I-6663, paragraph 31-4. This is helpful as drawing a clear contrast between the normal BLP rule and the special rule for “overheads” (or “general costs”). The case concerned a company whose only activity was the acquisition and holding of shares in other companies. That was not in itself a taxable activity. One question raised by the national court was whether such a holding company could deduct VAT charged on expenditure incurred in respect of various services obtained in connection with the acquisition of a shareholding in a subsidiary. The court noted the ordinary principle: 
“29. In accordance to settled case-law (the relevant provisions of the Directives) must be interpreted as meaning that, in principle, the existence of a direct and immediate link between a particular input transaction and a particular output transaction or transactions in respect of which VAT is deductible is necessary before the taxable person is entitled to deduct input VAT and in order to determine the extent of such entitlement….
31.	However, this approach could not be applied to Cibo’s position: 
“32. Clearly, there is no direct and immediate link between the various services purchased by a holding company in connection with its acquisition of a shareholding in a subsidiary and any output transaction or transactions in respect of which VAT is deductible. The amount of VAT paid by the holding company on the expenditure incurred for those services does not directly burden the various cost components of its output transactions in respect of which VAT is deductible. That expenditure does not form part of the costs of the output transactions which use the services. 
32. On the other hand, the costs of those services are part of the taxable person's general costs and are, as such, cost components of an undertaking's products. Such services therefore do, in principle, have a direct and immediate link with the taxable person's business as a whole …”
32.	The court concluded:
“35… expenditure incurred by a holding company in respect of the various services which it purchased in connection with the acquisition of a shareholding in a subsidiary forms part of its general costs and therefore has, in principle, a direct and immediate link with its business as a whole. Thus, if the holding company carries out both transactions in respect of which VAT is deductible and transactions in respect of which it is not, it follows from the first paragraph of Article 17(5) of the Sixth Directive that it may deduct only that proportion of the VAT which is attributable to the former.” (emphasis added)
33.	In the Trust’s skeleton it is said (para 26) that these cases depend on a linkage which is “generalised rather than specific to any particular output”; and that:
“It follows that the nature of a “direct and immediate link” varies from business to business; and encompasses a spectrum of possibilities from direct attribution of a given input to a given output at the one end, to overheads of the business attributable to the whole of the business activity at the other.”
I accept the premise, but not the conclusion. In my view, the metaphor of a “spectrum” is unhelpful; a “slippery slope” might be more apt. The special treatment of “overheads” or “general costs” serves a particular and limited purpose in the VAT system, for those inputs which would not otherwise be brought within the calculation. It should not be extended beyond that purpose. The dichotomy between this and the ordinary rule was correctly identified by Hart J:
“If the inputs fall into the (residual) category it may be for one of two reasons.  First, they may not be specifically attributable either to exempt or to taxable supplies.  In that situation they are described in the European jurisprudence as being overheads, i.e. cost components of the business as a whole…  Secondly they may be specifically attributable both to particular exempt and taxable supplies…”
34.	As he said, Dial-a-Phone was an example of the latter category. So is the present case: it is not about “overheads”, but about specific attribution. There is no doubt that the production services can be attributed to specific supplies in the form of the exempt ticket supplies. The only question is whether they can be attributed, in addition, to other (taxable) supplies. I would reject the “overheads analysis”. 
The link with specific items 
35.	I turn to the second submission. The points at issue before us, as summarised in the Trust’s skeleton, were three:
i)	Programme sales;
ii)	Production-linked merchandise;
iii)	Sponsorship.
Programme sales
36.	The Trust was responsible for production of the programmes, as the tribunal explained (para 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.”
In the Miss Saigon contract there is specific provision for programmes:
“The (Trust) retains the right to produce the Theatre programmes and reserves the right for it or its agent to obtain four weeks in advance from the Touring Manager, adequate logos, photographs, casting information etc.” (cl 16.1)
37.	The Trust’s argument on this item is simple:
“The programme itself uses the production: it contains photographs of the production, it contains photographs and details of the actors, it describes the play or work (often giving a synopsis of the work – particularly opera), and gives details of the playwright or composer.  The production of the programme is dependent upon, and actually uses the production.  There is plainly a direct and immediate link.”  
38.	Miss Hall disputes this analysis:
“The production costs are not direct cost components of the programmes. The mere fact that they contain information about the performance does not create a direct and immediate link with the production costs that were incurred in order to make that performance possible. The subjective perspective of the theatre-goer and the fact that reading the programme may enhance his enjoyment of the performance does not create a direct and immediate link between the production costs and the supply comprising the sale of a programme. There is no objective link between the two, let alone a link which is direct and immediate. What is being “used” is the commercial opportunity which arose out of an audience which had paid for the right to see the performance.”
39.	The tribunal dealt with programme sales as parts of a group, including sales of confectionery and other merchandise, of which it concluded (para 62):
“(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…
(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, confectionery, drinks, sundry items and merchandise were all purchased separately from the ticket for the performance… 
(5) Patrons attending the theatre could choose whether to purchase the programmes, confectionery, 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, confectionery, 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.”
40.	By dealing compendiously with all these items, the tribunal has, in my view, failed adequately to address the particular characteristics of the programme sales, as distinct from the other items, for example, sales of confectionery and drinks. Rightly in my view, the Trust has not sought in this court to claim a sufficient link between such sales and the production services. Such sales are the same in character whether they are in an ordinary shop, a theatre kiosk, or a railway station. As with the bar sales in the Royal Agricultural College case (cited in Dial-a-Phone, see above), any link with the activities of the particular location is “indirect and not immediate”. The programme sales were distinguishable, because of the necessary link between the contents of a programme and the particular production for which it was sold. The question for the tribunal was whether this link was “sufficiently close” to meet the BLP test. Failure by the tribunal to recognise and address this distinction was in my view itself an error of law, which entitles us to reconsider the primary facts.
41.	One can extract four more specific points from the tribunal’s reasoning:
i)	The selling price of the programmes was not related to the consideration paid to the production companies, but was arrived at by fixing an appropriate mark-up on the cost of materials used;
ii)	There was no support in the company’s accounts for a relationship between the sales of programmes and the consideration paid to the production company;
iii)	The programmes were bought separately from tickets, and patrons could choose whether to buy them;
iv)	Prior purchase of a ticket would “break the link” (if any) because of the exempt nature of the ticket supply.
42.	Without disrespect to the tribunal, I find none of these points persuasive: 
i)	The lack of a direct relationship between the price of the output supply and the consideration paid for the input is not determinative. I would adopt Hart J’s comment, based on Dial-a-Phone:
“…, in finding that… the BLP test was satisfied in that case, no reliance was placed either by the Tribunal or the higher courts on any finding that the price charged for the insurance intermediary services had been calculated by reference to the cost of the advertising and marketing inputs.  These were nonetheless found to have been “used for” supplying those services.  A sufficient nexus existed without it being necessary to show that those inputs were a “cost component” of the price charged for the relevant outputs in the very narrow sense adopted by the Tribunal in the present case.” (para 44)
ii)	The company’s accounts may be of some relevance, but they are unlikely to be conclusive. Their purpose is to give a fair view of the business, not of the relationships between particular inputs and outputs for VAT purposes.
iii)	That the patron has a choice whether to buy is true of any retail sale, but seems to me irrelevant to the question of attribution. That might have been relevant to an argument (which has not been advanced) that there was one composite supply of the ticket and the programme, but not to the nature of the link within any particular supplies. 
iv)	The tribunal seems to have misunderstood the “breaking the chain” rule. That would only come into play if the two transactions were links in the same chain, in the sense that one was “a cost component” of the other (see point (viii) in para 11 above). However, the ticket sales and the programme sales are not linked in that way; they are separate transactions. The mere fact that one precedes the other in time, as Miss Hall accepts, is not enough. The question is, not whether they are links in the same chain, but whether each of them has a sufficiently direct link with the production supplies to satisfy the BLP test. The misapplication of the “breaking the chain” rule was another error of law, which entitles us to re-open the tribunal’s conclusion.
43.	On this point I accept the Trust’s submissions. Applying the Beynon approach (see para 10 above), I think we are entitled to draw our own inference from the primary facts which are not in dispute. I would in any event be prepared to go further, if necessary, and say that, applying the BLP test correctly, the only reasonable view is that there was a direct and immediate link between the production services and the programmes. It is true that the production companies were not directly responsible for the programmes, other than the provision of information. But the productions for which they were responsible, and which provided the subject-matter of the contracts, also provided the subject-matter of the programmes. To that extent, they were as much part of the raw material used in preparing the programmes, as the paper and ink from which they were physically made. That in my view is an objective link, sufficiently close to satisfy the test. 
44.	For the reasons already explained that conclusion is enough to support Hart J’s decision, albeit on different grounds. I can accordingly deal with the other points relatively briefly. 
Production-linked merchandise
45.	Of this item the tribunal found (para 23-4):
“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. 
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.”
46.	The Trust argues that the second “show-specific” category satisfied the BLP test:
“Some merchandise being sold was show-specific merchandise: CDs, T-shirts, hats, programmes etc. The merchandise is marketable only because the purchasers of it are going or have been to see the show in question.  This is a further example of Mayflower using the productions to make supplies beyond tickets alone.”    
47.	The tribunal did not deal with this argument in terms, but dismissed it on other grounds (para 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.”
48.	This conclusion is criticised by the Trust:
“The Tribunal’s conclusions are at para 61… are difficult to follow.  Mayflower takes a 25% share in the sale proceeds in consideration of its agency services in the sale of this merchandise…  That is taxable.  The productions have a direct and immediate link with these merchandise sales.”
49.	I see the force of this criticism. Even if one accepts it, however, the precise nature of the link remains unclear. I infer that the “show-specific” merchandise is part of the production company’s general stock, rather than (like the programmes) being produced for the particular production which is the subject-matter of the contract. If that is correct, the tribunal would have been entitled in my view to conclude that the link was not sufficiently direct. 
Sponsorship arrangements
50.	The Trust’s case is conveniently summarised in the skeleton: 
“There were a variety of sponsorship arrangements entered into by Mayflower at the material time, which the Tribunal has not sought to analyse separately (see para 63).  Those various arrangements [as explained in the Trust’s evidence] were:
(i) Sponsorship of theatre seats by individuals or corporates;
(ii) Corporate sponsorship, including:
(iii) Curtain sponsorship; and
(iv) Sponsorship of individual productions. 
Sponsorship of a seat is based on a close connection with the various productions shown at the theatre.  Such sponsorship is another way for Mayflower to generate money from the productions and closely relates to its business as a theatre.  
Sponsorship of the safety curtain is closely associated with the stage and with the productions themselves.  Mayflower uses the productions to generate money from this type of sponsorship.  It is not production specific, but rather uses all the productions.  
Sponsorship of an individual production plainly uses the production, in the sense of creating rights in relation to and out of that production.  Those rights are similar in terms of legal analysis to the right to see the show using a ticket.”  
51.	In its conclusions, the tribunal dealt with the matter more generally, without distinguishing between the different types of sponsorship (para 63). Some of its reasons for rejecting the Trust’s arguments were similar to those relied on in respect of programme sales, and are open to criticism for the same reasons: for example, the lack of support in the accounts, and the lack of any direct link between the production contracts and the pricing of the sponsorship arrangements. On the other hand they found that the Trust had produced “no evidence of sponsorship of individual shows”, other than that relating to marketing campaigns with the local radio companies, a case which they had rejected “on the balance of probabilities – para 31). They also found that there was no “temporal link” between the sponsorship agreements and the contracts 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”.
52.	In my view, the tribunal was entitled to attach importance to the lack of a direct connection between the sponsorship and a particular production, or group of productions. That indicates a link with the activities of the theatre as a whole, rather than with the subject-matter of the production contracts. Thus, for example, curtain sponsorship is no doubt directed at theatre-goers, including those attracted by individual productions. But the tribunal would be entitled to regard that link as insufficiently “direct and immediate” to satisfy the test. Apart from the “taxable tickets” point, the judge seems to have taken the view that the findings of the tribunal were not sufficiently clear to support this part of the argument. On the material we have been shown I see no reason to disagree. 
“Taxable tickets” 
53.	Against the background of my conclusion in respect of programme sales, the taxable tickets analysis loses the significance it acquired before Hart J. He acknowledged that the point had not been deployed in the same terms before the tribunal. In paragraph 49 he summarised the argument as put to him by Miss Whipple for the Trust:
“The argument was simply that the inputs were directly and immediately linked with the exempt supplies of tickets to the general public because the production costs had been incurred for the purpose of producing the show to which the public would be granted admission.  If the appellant was also earning income from granting a right of admission under the umbrella of a taxable supply, there could be no difference in principle, so far as the directness and immediacy of the link was concerned, between the exempt and the taxable supplies.”
54.	Hart J found the argument compelling in principle, but hampered by the understandable lack of any explicit findings of fact by the tribunal on the point. There were indications in the evidence of tickets being supplied in connection with four types of supply: corporate entertainment, theme evenings, radio “sponsorship”, and general sponsorship. Having rejected the first three for lack of sufficiently clear supporting evidence, he turned to the fourth: 
“… in relation to sponsorship the evidence before the Tribunal of particular examples admitted, in my judgment, only of the conclusion that the sponsorship income was the result of a single taxable supply by the appellant which included the provision of tickets.  On that footing I accept Ms. Whipple’s submission that there were taxable supplies of the right to see the productions, and that the production costs were linked to those supplies in precisely the same way as to the exempt supplies.  That conclusion prevents an analysis, such as was applied in BLP and Southern Primary, under which the attribution of particular costs exclusively to the exempt supplies results in their being wholly consumed by the exempt supplies and incapable of being viewed as general overheads of the business.”
55.	In this court, Miss Hall for HMRC has submitted that this approach was wrong in principle, as contrary to the Card Credit Plan principle. As she puts it in her skeleton: 
“… any rights in the various taxable packages that are associated with the performance are different in character to the rights inherent in the sale of admission rights. The tickets were complimentary and were not referable to any particular performance. Each of the sponsorship agreements under consideration was for a particular period of time and not referable to any particular performance. Under those agreements, the rights granted by Mayflower largely comprised the right to display a logo. That right is not referable to any particular production. Further, the sponsors were not sponsoring individual productions but Mayflower’s activities as a whole. By contrast, the production costs were incurred in respect of goods and services which by their nature were directly linked to a specific performance. Objectively there was therefore no direct and immediate link between those costs and the taxable supplies reflected in the sponsorship agreements…”
56.	In other words, the tickets offered to sponsors cannot be artificially separated from the sponsorship arrangements. This does not mean, as Mr Milne sought to suggest, that the supplies of tickets are “nullified” for VAT purposes. It simply means that for attribution purposes they stand or fall with the arrangements of which they form part. The judge, with respect, was wrong to be seduced by what no doubt seemed an attractively simple way of deciding the case, attractively presented. In my view Miss Hall is correct on this point.
Conclusion 
57.	For these reasons, which differ from those of the judge and are based solely on the link between the production services and programme sales, I would uphold the judge’s order and dismiss the appeal.
Lord Justice Chadwick : 
58.	I agree that this appeal must be dismissed. 
59.	As Lord Justice Carnwath has observed, the order in which the arguments were presented – although understandable, given the basis on which the judge had decided the appeal which was before him – tended to distort the analysis of the real issues. On a true analysis, it can be seen that the appeal turns on a narrow point: whether the services supplied to the Trust under the production contracts were used by the Trust for the purposes of any of the taxable supplies of goods and services which the Trust makes in the course of its business.
60.	The right to deduct input tax, conferred in Community law by Article 17(2) of the Sixth Directive, is given effect in domestic legislation by sections 25(2) and 26 of the Value Added Tax Act 1994. The right exists in circumstances where there is a sufficient link between the goods or services supplied to the taxable person (on which he pays input tax to his supplier) and goods or services supplied by the taxable person (in respect of which he must account for output tax paid by his customer). But there is the further requirement that the link is with goods and services supplied by the taxable person which, themselves, fall within section 26(2) of the 1994 Act. In the present context, the requirement is that the link is with taxable supplies: paragraph (a) of section 26(2). 
61.	The link that must be established is that the goods or services supplied to the taxable person are “used or to be used” for the purposes of supplies which he makes: Article 17, paragraphs (2), (3) and (5), of the Sixth Directive and section 26(1) of the 1994 Act read with regulation 101(1) and (2) of the Value Added Tax Regulations 1995 (SI 1995/2518). It has been held, by authority which binds this Court, that the link must be “direct and immediate”: BLP Group plc v CCE [1995] STC 424, Dial-a-Phone Ltd v CCE  [2004] EWCA Civ 603, [2004] STC 987. 
62.	In the present case it is not, I think, in dispute that each production contract must be treated as a separate supply of services. So, if the Trust is to be entitled to deduct the input tax which it pays in respect of any given production contract from output tax on taxable supplies which it makes in the course of its business, it must establish the necessary link between the services supplied to it under that production contract and some taxable supply which it makes. It is not enough for the Trust to assert that all the taxable supplies which it makes in the course of its business are linked, in a general sense, to its ability to stage performances of productions which it has “bought in” under production contracts.
63.	Nor is it in dispute that the services supplied to the Trust under any given production contract are used by the Trust in the sale to the public of tickets which give admission to performances of that production. There is, plainly, a direct and immediate link between the services supplied under the production contract and the supply of tickets for a performance of that production. But the supply of tickets to the public is an exempt supply under Article 13(A)(1)(n) of the Sixth Directive and is within Group 13 of schedule 9 and section 31 of, the 1994 Act. An exempt supply is not a taxable supply:  section 4 of the 1994 Act. 
64.	Sub-paragraph (c) of regulation 101(2) of the 1995 Regulations (read with sub-paragraph (a)) requires that no part of the input tax on such of the goods and services supplied to the taxable person as are used or to be used by him exclusively in making exempt supplies shall be attributable to taxable supplies. Sub-paragraph (d) of that regulation requires that where goods and services supplied to the taxable person are used or to be used by him in making both taxable and exempt supplies, a proportion of the input tax on those goods and services shall be attributed to taxable supplies. The relevant question in the present context, therefore, is whether the services supplied under a given production contract were used by the Trust exclusively in making the (exempt) supply of tickets to the public, or were used by the Trust in making both that (exempt) supply and some other (taxable) supply. 
65.	The judge’s answer to that question was that the services supplied to the Trust under a given production contract were used in making both the (exempt) supply of tickets to the general public and a supply of tickets, in conjunction with other services, to sponsors. The supply of services under sponsorship agreements was plainly a taxable supply. So, as the judge held, the supply of tickets under those arrangements was itself a taxable supply linked to the performance of the given production. I agree with Lord Justice Carnwath, for the reasons which he has given, that the judge’s answer to the relevant question cannot be upheld on the basis of the “taxable tickets” analysis which he was persuaded to adopt. Put shortly, the basket of rights under a sponsorship agreement are not linked to any given production: it would be artificial to take one right in that basket (the right to complimentary tickets over the period of the sponsorship – that is to say, over a period which is not confined to the run of any given production) and attribute that right to the particular production in respect of which complimentary tickets were taken up by the sponsor.
66.	Nevertheless, the question remains: was there some other taxable supply made by the Trust for which the services supplied to it under any given production contract were linked. Again, I agree with Lord Justice Carnwath, for the reasons that he has given, that the proper inference from the primary facts which are not in dispute is that there is a direct and immediate link between the services to be supplied under a given production contract (which include, of course, one or more performances of the production) and the sales of programmes specific to that production. I should add that it is not in dispute that the supply of programmes by the Trust is a taxable supply, albeit that it is zero-rated: section 30(1) of the 1994 Act and Group 3 in schedule 8, read with section 30(2). 
67.	Although conscious of the need for an appellate court to show some circumspection before interfering with the decision of the tribunal on questions of this nature – to which Lord Hoffmann drew attention in Beynon v CCE  [2004] UKHL 53, [27] – I have been persuaded that, on this issue, this Court is entitled – indeed, required – to differ from the tribunal’s conclusion. The reasoning which led the tribunal to the conclusion that there was no direct and immediate link between production and programme sales can be seen to be flawed, for the reasons which Lord Justice Carnwath has explained.            
68.	The conclusion that the link between the services supplied to the Trust under any given production contract and the taxable (but zero-rated) supply of programmes by the Trust is sufficient to bring the case within regulation 101(2)(d) of the 1995 Regulations leads to a result which, as Lord Justice Carnwath has observed, appears surprising. The proportion of the input tax paid by the Trust in respect of the services supplied under each production contract which is attributable to taxable supplies for the purposes of regulation 101 and section 26(1) of the 1994 Act – and so the proportion of such input tax that can be deducted from output tax - is not determined by reference to the output tax for which the Trust is accountable in respect of the supply of programmes (which would be nil) or by reference to the total value of the programme sales in relation to that production. The apportionment which is to be made under regulation 101(2)(d) – in a case which falls within that regulation – is an apportionment in which the ratio is “the value of taxable supplies” to “the value of all supplies” made by the taxable person in the relevant accounting period. It has been common ground on this appeal that the ratio is to be ascertained by including in both numerator and denominator the value of all taxable supplies, including taxable supplies which cannot be said to be attributable to the services supplied to the Trust under the production contract. We have not been invited to consider whether, on a true analysis, that is the correct view of the effect of regulation 101(2)(d): as I have said, it has been common ground that it is. But, if that is the correct view, then the effect, on the figures provided to us, is that programme sales of relatively small value (in respect of which no output tax accrues to the Trust because the sales are zero rated) leads to the right to deduct from output tax accrued on other taxable supplies a very substantial proportion of the input tax paid in respect of the production contracts. 
69.	I was, at first, minded to take the view that that was so surprising a result that it could not have been intended. But I am satisfied that, if that is the result, it flows from the provisions for apportionment which are prescribed in regulation 101(2)(d); and not from the application of the principles which determine attribution of input tax between taxable and exempt supplies. However surprising the result, it does not call into question those principles or their application to the facts in the present case. And, if the result is one which the Commissioners did not intend, they have power to direct (at least for the future) the use of some other method of apportionment – regulation 102 of the 1995 Regulations. 
Lord Justice Auld:
70.	I agree for the reasons given by Carnwath LJ in paragraphs 19, 20 and 36-44 of his judgment, that the appeal should be dismissed on the ground of the direct and immediate link with a specific taxable output, namely programme sales.