HM Revenue and Customs v London Clubs Management Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Etherton,Lord Justice Pitchford,Lord Justice Ward |
| Judgment Date | 18 November 2011 |
| Neutral Citation | [2011] EWCA Civ 1323 |
| Docket Number | Case No: A3/2010/2875 |
| Court | Court of Appeal (Civil Division) |
| Date | 18 November 2011 |
[2011] EWCA Civ 1323
Lord Justice Ward
Lord Justice Etherton
and
Lord Justice Pitchford
Case No: A3/2010/2875
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM UPPER TRIBUNAL
Mrs Justice Proudman
Tax and Chancery Chamber
Royal Courts of Justice
Strand, London, WC2A 2LL
Alison Foster QC and Richard Smith (instructed by Zwennes Revenue and Customs) for the Appellants
Mr Andrew Hitchmough and Jonathan Bremner (instructed by BDO Stoy Hayward) for the Respondents
Hearing dates : 4th October 2011
Introduction
This appeal concerns the way in which VAT on supplies to a business, which itself makes both supplies subject to VAT and supplies exempt from VAT, is to be apportioned where the inputs are not directly attributable to either the business's taxable or exempt supplies alone but are attributable to both. In technical terms, it concerns the circumstances in which the taxpayer can establish that, rather than the standard method of attribution, which is based on the relative contribution to turnover of the different business activities, the attribution of residual input tax should be based on an alternative method, a Partial Exemption Special Method ("PESM").
By its decision published on 5 August 2009 ("the Decision") the First-Tier Tribunal (Tax Chamber) ("the FTT") allowed the appeal of the respondent, London Clubs Management Limited, from the rejection by the Commissioners for HM Revenue and Customs ("the Commissioners") of the respondent's application for a floor space PESM ("the proposed PESM"). The Commissioners' appeal from the Decision was dismissed by Proudman J in the Upper Tribunal (Tax and Chancery Chambers) ("the UT") on 5 October 2010. The further appeal to this Court is brought with her permission.
The appeal from the FTT to the UT was on a point of law only, as is the appeal from the UT to this Court: Tribunals, Courts and Enforcement Act 2007 ss. 11–14.
The factual background
The following account of the factual background is based on the helpful summaries of the FTT and Proudman J.
The respondent is the representative member of a VAT group comprising a number of companies carrying on business in the United Kingdom, Egypt and South Africa ("the Group"). The Group is ultimately owned by Harrah's Entertainment Inc, a US casino and entertainment group that runs, among other well known businesses, Caesar's Palace and the World Series of Poker. The Group operates 11 casinos in the United Kingdom. Five of these operations are in London, and there is one in each of Manchester, Leeds, Glasgow, Nottingham, Brighton and Southend. References in this judgment to the respondent are to be treated as references to all the companies in the Group.
The Gambling Act 2005 followed a lengthy period of consultation on the modernisation of casino gambling regulation. It was preceded by the publication of the Budd Report on gambling in 2001. That report included recommendations for, among other things, increasing the number of slot machines which could be operated on casino premises.
The respondent took leases of substantial premises in anticipation of a greater floor area being available for slot machines. Due to a change in government policy, however, the proposals for increased slot machine numbers were changed to a limitation of 20 such machines per casino. The respondent developed a new business strategy to enable it to make the best use of the space it had taken, namely the addition of restaurants and bars, the carrying on of an entertainment business, including corporate events, and the provision of dedicated space for poker.
The legislative changes permitted immediate entry into casinos, whereas there had previously been a "cooling off" period, and allowing customers to consume alcohol on the gaming floor. Furthermore, casinos were no longer required to operate as private members' clubs. As a result, all the respondent's casinos allow customers immediate access, without the requirement to produce identification on entry.
In consequence of those changes, the respondent regards itself as competing on a level playing field with others in the food, beverage and hospitality sectors. It seeks to target as customers not only those who wish to gamble but others who wish to attend the casinos solely to consume the food and beverage and generally to enjoy the non-gaming entertainment facilities on offer. Apart from one casino, however, the respondent has no figures for those who attend solely for the restaurants and bars.
As well as those customers who enter the casinos solely to use the bars and restaurants, gaming customers also expect food and beverage services to be available on-site.
The following supplies are made by the respondent at its casinos: gaming, such as roulette and blackjack, which is exempt from VAT but is subject to gaming duty; slot machines, which are VAT standard rated; dedicated poker facilities, which were VAT standard rated until 27 April 2009, and were then exempt from VAT but subject to gaming duty; bar sales, catering, entertainment and venue hire, all of which are VAT standard rated.
The FTT made the following findings on the use of space in the respondent's casinos on which they had evidence. The premises in each case had a mixed use of gaming, restaurants, bars and entertainment, all within a casino context. Some areas were physically separated, for example the restaurant area in The Sportsman casino was separated from the main gaming floor by being on a separate floor of the premises, and was separated from the poker room by a curtain. In the case of other areas, such as the bars, there was less physical separation. In all areas separate and identifiable floor space was occupied by the different parts of the business. Full restaurant dining facilities were provided, in defined restaurant areas, with extensive menus and table service. The type of restaurant differed from venue to venue, but included fine dining in Manchester and in Glasgow and a Michelin-starred chef at the Leeds casino. Customers were able to move easily between the different areas, for example from the restaurant to the gaming areas and from the gaming areas to the bar. Customers could consume drinks in the gaming area, and could be served light snacks, such as sandwiches, at the gaming tables. Use of a particular area of floor space for a particular activity was liable to change; for example, in order to increase profitability the space formerly occupied by a bar could be changed to use for gaming. Substantial areas of floor space were designated for use other than gaming, food, beverages and entertainment. Those areas included reception, toilets, staff rooms, management offices, corridors, lifts and the space occupied by the cashiers. Evidence was given that cash for all elements of the business was dealt with by the cashier function.
Not all of the food and drink consumed was charged for. A significant percentage was supplied free of charge to certain gaming customers. The percentage of non-charge food and beverage differed substantially between different casinos. For example, the non-charge percentage of total food and beverage sales for the period April 2008 to March 2009 varied from as little as 14.6 per cent to 94 per cent.
The food and beverage element of the business, comprising the restaurants and bars, was not profitable in its own right. It did, however, generate a positive return in each of the casino venues for the period in question in the proceedings (after deduction of direct costs). It made a contribution to overheads in management accounting terms, except for The Sportsman casino, which achieved a break even result.
A fair estimate of the proportion of the residual costs of the business that were property related was 71 per cent.
Under the respondent's existing PESM, residual input tax is apportioned by applying a fraction comprising taxable turnover over total turnover, with an adjustment to take account of the fact that residual input tax attributable to food and drink for which customers have not been charged is not deductible.
The proposed PESM moves from a turnover based method to a floor space method. The fraction to be applied to the residual input tax under the proposed PESM is, in simple terms, the area of floor within the respondent's premises occupied to make taxable supplies over the area of floor occupied to make taxable and exempt supplies, again with an adjustment to take account of residual costs associated with non-charged food and drink.
The Commissioners rejected the proposed PESM on the ground that it is not fair and reasonable, and certainly not more fair and reasonable than the existing method.
The legal principles
The applicable legislation is both European and domestic. At the relevant time the Sixth Directive 1977/388/EEC was in force. It has been superseded by Council Directive 2006/112/EC on the Common System of VAT, but without any change in substance as far as the issues in this case are concerned.
Article 2 of the First Directive 1967/227/EEC includes the following:
"On each transaction, value added tax … shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components."
Article 17(2) of the Sixth Directive provides (so far as is relevant):
"In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax...
To continue reading
Request your trial
-
Volkswagen Financial Services (UK) Ltd v Revenue and Customs Commissioners
...This general approach to economic use was approved by this court in Revenue and Customs Commissioners v London Clubs Management Ltd [2011] EWCA Civ 1323 which concerned a PESM for apportioning the residual input tax of a gambling business. Some of its gaming supplies were exempt; some stan......
-
Last Passive Ltd (t/a Aircoach) v Revenue Cmrs
...of SKF's products [taxable supplies].' (Emphasis added.) 120 26 [72] In London Clubs Management Ltd v Revenue and Customs Comrs [2012] STC 388, the Court of Appeal had another opportunity to consider the principles applicable where a taxpayer made both taxable and exempt supplies. The taxpa......
-
Ingenious Games LLP and Others v Revenue and Customs Commissioners
...conclusion, we have been very mindful of the need to read the FTT's decision as a whole: see R & C Commrs v London Clubs Management Ltd [2011] BVC 406 at 422. As explained there, a judgment is not to be interpreted like a statute, and its reasoning and sense are to be gathered by a fair rea......
-
Longridge on the Thames v The Commissioners for HM Revenue and Customs
...the decision of the FTT is to be read as a whole and its sense was to be gathered by a fair reading of it: see HMRC v London Clubs [2012] STC 388 at 47 As to the meaning of business activity, Mr Thomas accepts that the meaning is an objective one and that it was impermissible to have regard......