R & C Commissioners v Hippodrome Casino Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 29 January 2024 |
| Neutral Citation | [2024] UKUT 27 (TCC) |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2024] UKUT 27 (TCC)
Judge Rupert Jones, Judge Vinesh Mandalia
Upper Tribunal (Tax and Chancery Chamber)
Value added tax – Recovery of residual input tax – Whether FtT erred in failing to determine whether there was dual use of taxable supplies of entertainment & hospitality also for the non-taxable supplies of gaming in the casino – Whether a standard method override, using allocated floorspace, guarantees a more precise determination of economic use and the proportion of recoverable input tax than the standard method using proportion of turnover for taxable and non-taxable supplies.
In R & C Commrs v Hippodrome Casino Ltd [2024] BVC 503, the Upper Tribunal set aside and remade the decision of the FTT in Hippodrome Casino Ltd, allowing HMRC’s appeal and dismissing HCL’s underlying appeals against HMRC’s decision to refuse the standard method override (SMO) proposed by HCL, and in relation to the operation of the capital goods scheme.
HCL was established in 2005. It acquired the Hippodrome in Leicester Square, London, obtained a gaming licence, and embarked on a very significant refurbishment programme over all five floors of the building which now house a restaurant, bars, gaming floors, a theatre and a terrace. They supplied exempt gaming activities, taxable hospitality and taxable entertainment services. Complimentary supplies of food and drink are supplied to some of its most valued customers (predominantly gaming customers). A partial exemption method was required to determine the recovery rate on residual expenses. HCL contended the attribution calculated under the standard method differed substantially from the extent to which goods and services were used to make taxable supplies. A standard method override (SMO) calculation was therefore required and HCL proposed one based on floor space. HMRC refused the proposal, and argued that it did not represent a fairer or more reasonable proxy for HCL’s economic use of its overhead expenditure than the standard method, which should therefore be retained. HCL appealed and the FTT found in their favour.
HMRC were granted leave to appeal to the UT on five grounds. Essentially, however, their main contention before the FTT had been that the proposed SMO had been critically flawed because it proceeded on the basis that hospitality and entertainment areas were used exclusively for taxable supplies and ignored the economic reality that both the hospitality and entertainment areas also supported and promoted the gaming activity meaning these areas had a dual use. They claimed, and the UT agreed, that the FTT despite making findings of fact capable of supporting dual use, had failed to address or to engage with this issue which was the core of their case. The FTT also therefore failed to give any reasons for rejecting this contention and reaching the decision it did.
The UT considered this a material error of law and decided to set aside the decision of the FTT and re-make it.
The standard method is used to determine how much input tax is attributable to taxable supplies, based on the value of supplies. The standard method override (SMO) applies if the attribution of input tax under the standard method fails to fairly reflect the extent to which the input tax is used in making taxable supplies. Following the CJEU decision in R & C Commrs v Volkswagen Financial Services (UK) Ltd (Case C-153/17), any proposed method did not have to be the most precise possible but had to guarantee a more precise result than the result that would arise from the standard method. The burden of proof must be on the taxpayer to establish that was the case with their proposed method.
HMRC argued the SMO was flawed, and a less precise measure of economic use than the standard method, because it ignored the dual use of hospitality and entertainment areas in supporting the gaming business. The UT considered whether or not there was any such dual use. It found that the gaming business was the principal part of HCL’s business at the premises, but the ability to cross-sell was a large part of their success. The bars, restaurant and theatre were not merely ancillary to gaming. There would be some customers that visited the venue without gaming but there was also plainly some overlap between HCL’s various offerings. Non-gaming areas were, however, necessary for regulatory reasons. The bars, restaurant and theatre also helped to increase the dwell time of gamers. Neither the hospitality nor the entertainment businesses were profitable for the entirety of the relevant period. That lack of profitability was not determinative of the appeal but was said to be evidentially significant alongside the other evidence of duality of use. If a commercial business incurred costs and the immediate use was for a business activity that was not profitable but it supported a second profitable activity, that might support a finding that at least part of the economic use of the costs is to further the profitable activity. It was the gaming that justified the ongoing expenditure in the building. The UT, therefore, did not accept the hospitality and entertainment areas could be properly described as independent offerings entirely separate to the gaming. The economic reality was that the floor areas allocated for hospitality and entertainment had significant dual use for gaming as well, as claimed by HMRC.
The UT then turned to consideration of whether the SMO was a more reliable proxy than the standard method. HCL contended the standard method did not accurately reflect the economic use of HCL’s overhead cost because of its assumption that the economic use of vat bearing overhead costs in producing £1 of taxable income was identical to the economic use of those costs in producing £1 of exempt income but gaming generated a higher turnover per square foot than hospitality. A third of the visits to the Hippodrome did not involve any gaming. This figure, they said, should be the baseline above which the true extent of HCL’s economic use to make taxable supplies lay, yet the recovery percentage as a result of the standard method was between 12% and 22%. The UT, however, did not accept this meant the floor space SMO, producing a much higher recovery rate of approximately 52%, was a more precise measure for the recovery of residual input tax. The SMO was based on the premise that the gaming business was entirely separate from the other activities but they had already found this was not the economic reality. The hospitality and entertainment facilities significantly supported the core gaming business and provided a luxury environment designed to ensure it retained a competitive advantage in the gaming industry. The SMO assumed the unallocated floor area, was used in the same proportion as taxable and exempt areas (53% taxable use) but this was found to be distortive since there was evidence that 70% of customers had come for gaming purposes and only 30% for hospitality or entertainment and, in relation to staff areas, that a similar 33% of staff worked in the taxable business. Other aspects also pointed to the standard method providing a fairer, more reasonable and precise determination. The SMO did not allow for any dual use, whereas the standard method reflected the dual use. A third of customers did not gamble and that was a physical proxy for the economic use but did not take account of the higher spending of gambling customers. Finally, the turnover method allowed for fluctuating turnover and proportions of taxable and exempt supplies whereas the floor space method did not. The SMO had not been shown to produce a fairer result or guarantee a more precise determination of the economic use than the standard method. Accordingly, the appeal against HMRC’s refusal of the proposed SMO was dismissed.
A secondary issue regarding how the use of the Hippodrome for business entertainment purposes should be treated under the capital goods scheme concluded with the UT confirming HMRC’s position that the VAT is first restricted to account for any use for business entertainment, and the residual amount is then apportioned under the standard method.
Where both taxable and exempt supplies are made, any method of attribution of residual overheads is, by necessity, only an estimate or approximation of the actual use of those overheads. In the absence of a partial exemption special method (PESM) the standard method of attribution must be used. If, however, the attribution made under the standard method differs substantially from one which represents the extent to which the goods or services are used, the standard method may be overridden. This was initially introduced as an anti-avoidance measure but the taxpayer, in this instance, had attempted to use it to enhance their recovery rate. The method adopted for calculating the difference must, however, be a more reliable proxy for the use of overhead costs and guarantee a more precise result than the standard method. Not just physical use but the economic use of the asset. Unfortunately in this case, unlike R & C Commrs v London Clubs Management Ltd., the taxpayer was unable to convince the UT that their proposed method satisfied this test due to the perceived substantial dual use of hospitality and entertainment areas to support the gaming activity.
Comment by Angela Bedi, Senior Tax Writer, Croner-i Ltd.
Matthew Donmall, counsel, instructed by the General Counsel and Solicitor to His Majesty's Revenue and Customs appeared for the appellants
Andrew Hitchmough KC and Ronan Magee, counsel, instructed by PricewaterhouseCoopers LLP appeared for the respondents
[1] His Majesty's Revenue and Customs (“HMRC”) appeal against a decision of the First-tier Tribunal (Tax Chamber) (“the FtT” or “Tribunal”) released on 22 March 2022 under neutral citation [2022] UKFTT 110 (TC) [[2022] TC 08441] (“the Decision”)...
To continue reading
Request your trial