London Clubs Management Ltd v HM Revenue and Customs
| Jurisdiction | UK Non-devolved |
| Judgment Date | 05 August 2009 |
| Neutral Citation | [2009] UKFTT 201 (TC) |
| Date | 05 August 2009 |
| Court | First-tier Tribunal (Tax Chamber) |
[2010] TC 00154
[2009] UKFTT 201 (TC)
Roger Berner (Chairman); Sheila Wong Chong Frics (Member)
Andrew Hitchmough, instructed by BDO Stoy Hayward LLP, for the Appellant
Richard Smith, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents
VAT - Partial exemption - Special method - Value Added Tax Regulations 1995 (SI 1995/2518), reg. 102 - Whether proposed method fair and reasonable and more fair and reasonable than existing method
Partial exemption - Whether proposed special method fair and reasonable - Whether more fair and reasonable than existing method - The appeal concerned the refusal by the commissioners of the appellant's application to use a partial exemption special method based on floor area - The appellant was the representative member of a VAT group engaged in the casino, restaurant, bar and entertainment business - The supplies made at the appellant's casinos comprised exempt gaming activities and poker facilities and standard-rated slot machines, bar sales, catering, entertainment and venue hire - The existing partial exemption method was based on the standard method with an adaptation to reflect free of charge catering supplies - The proposed method utilised an apportionment of residual input tax using a formula based on floor areas used for the various activities - The commissioners contended that the appellant's proposed partial exemption method failed to meet the objective of a fair and reasonable attribution of input tax to taxable supplies as it did not reflect how the business used the costs - In support of this proposition, the commissioners contended that proxies based on physical factors, including floor area, were acceptable if they gave an economically meaningful result but, in this case, the gaming areas had driven the need for building costs because the gaming generated the bulk of the turnover and the bulk of the profits - The commissioners identified a number of factors to support their contention that the proposed method failed to produce a fair and reasonable apportionment of input tax - These included: that significant levels of cross-subsidisation between separate activities was ignored; that different activities of the appellant's business were not economically separable in the manner required for the method to produce a fair and reasonable approximation; that because of the open plan nature of the casinos, there were, to a large extent, no clearly definable areas which could be allocated to any specific activity; that there was no reason to suppose that unallocated floor area was used in the same proportion as the floor area occupied by the identified activities; and that a method based on floor-space produced inappropriate results where a significant proportion of the costs had little or no relationship with the floor area concerned - Held, that although gaming generated a higher turnover and profit per square foot compared with the restaurants and bars, that should not lead to the conclusion that gaming was the principal user or consumer of the general running costs of the premises - In the judgment of the tribunal, the proposed floor-area method produced a fair and reasonable allocation of such costs - The proposed formula also recognised that the catering activities were used to an extent to support and foster the gaming activities by means of the provision of free food and drink to certain gaming customers - Although the bulk of the residual costs were property-related, the floor-space method did not provide such a close approximation to use in respect of other costs - However, there was no evidence that this would produce a distortive result - Having decided that the proposed floor area method was fair and reasonable, the tribunal next considered whether it was more fair and reasonable than the existing method - In its opinion, the proposed method took account of the economic use of the floor space and, thus, the use and consumption of property-related expenditure in a way that the existing method did not - Accordingly, the proposed method was more fair and reasonable than the existing method - Appeal allowed.
1. This is the appeal of London Clubs Management Ltd ("the Appellant") against the rejection by HM Revenue and Customs ("HMRC") of the Appellant's application to use a floor-area based partial exemption special method. The proposed method was rejected by HMRC by way of a letter dated 2 October 2007 to the Appellant's advisers, BDO Stoy Hayward, and this rejection was confirmed, following a reconsideration, by a letter dated 7 August 2008.
2. The Appellant is the representative member of the VAT group concerned in this appeal. For ease of reference we refer throughout this decision to the Appellant, although the business activities are carried on by a number of different members of the VAT group.
3. Oral evidence was given by Mr Michael Rothwell, who is a chartered accountant and the Group Finance Director of the London Clubs International Limited ("LCI") group of companies. The Appellant is a wholly-owned subsidiary of LCI. The Tribunal was referred to an agreed bundle of documents and to a supplementary bundle, and in addition had the benefit of a site visit to the Appellant's premises at The Sportsman Casino in Old Quebec Street, London.
4. The Appellant group is engaged in the casino, restaurant, bar and entertainment business. It has operations in the UK, Egypt and South Africa.
5. The group is owned by Harrah's Entertainment, Inc, a US casino and entertainment group that incorporates brands such as Caesar's Palace, Paris, Bally's, Harrah's and the World Series of Poker.
6. In the UK the group operates 11 casinos. Five of these operations are in London, and there is one in each of Manchester, Leeds, Glasgow, Nottingham, Brighton and Southend.
7. Part of the background to this appeal relates to the enactment and implementation of the Gambling Act 2005, which followed a lengthy period of consultation on the modernisation of casino gambling regulation foreshadowed in the publication of the Budd Report (Gambling Review Report) in 2001. This report included recommendations of relaxation of marketing restrictions, increases in the number of slot machines which could be operated on casino premises and proposals for different categories of casino - Small, Large and Regional.
8. The Appellant planned its business strategy throughout this period to enable its business to benefit fully from the anticipated changes. The strategy had to adapt to frequent changes in Government policy. One of these changes was that proposals for increased slot machine numbers were reduced down to a level (which applies today) of 20 such machines per casino. This was a major disappointment for the Appellant, which had taken leases of substantial premises in anticipation of greater floor area being available for slot machines. Its new casinos, for example, have a floor area typically in excess of 50,000 to 60,000 square feet. With the reduction in the number of such machines the Appellant had to develop a new strategy to enable it to make the best use of this space to generate profits. This translated into the addition of restaurants and bars, and entertainment business, including corporate events, and dedicated space for poker.
9. The legislative changes also included permitting immediate entry into casinos (formerly there had been a "cooling off" period) and allowing customers to consume alcohol on the gaming floor. Furthermore, casinos are no longer required to operate as private members' clubs. All the Appellant's casinos allow customers immediate access, without the requirement to produce identification on entry. (Identification requirements remain in place for money laundering reporting purposes, but the requirement to produce identification is no longer a barrier to entry.) As a consequence the Appellant regards itself as able to compete on a level playing field with other operators in the food and beverage and hospitality sectors.
10. The Appellant is targeting what it regards as a significant customer base who attend casinos solely to access the food and beverage and entertainment facilities on offer, rather than to participate in gaming. However, apart from the casino at St James, the Appellant has no figures for those who attend solely for the restaurants and bars, and the Tribunal was not provided with any such figures.
11. As well as those customers who enter the casino solely to use the bars and restaurants, gaming customers also expect food and beverage services to be available on-site. The quality of the restaurant and bar offering is dictated by the strategy to attract customers with greater spending power.
12. The following supplies are made by the Appellant at its casinos1:
(2) Gaming (for example roulette, blackjack). This is exempt from VAT, but subject to gaming duty.
(3) Slot machines. Standard rated.
(4) Dedicated poker facilities. Standard rated up to 27 April 2009, thereafter exempt from VAT but subject to gaming duty.
(5) Bar sales. Standard rated.
(6) Catering. Standard rated.
(7) Entertainment. Standard rated.
(8) Venue hire. Standard rated.
13. In the course of his evidence Mr Rothwell referred us to floor plans and photographs for each of the casinos at Empire Casino, Leicester Square, London and Manchester 235, Great Northern Building, Manchester. We also reviewed the floor plan for The Sportsman Casino, which we visited on the second day of the hearing. We find the following facts in relation to those premises:
(2) The premises in each case have a mixed use of gaming, restaurants and bars and entertainment, all within a casino context.
(3) Some areas were physically separated, for example the restaurant area in The Sportsman was separated from the main gaming floor by being on a separate floor of the premises, and...
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