The Commissioners for HMRC v Hippodrome Casio Ltd

For a standard method override to displace the turnover-based method of attributing residual input tax, the taxpayer must establish that its proposed use-based method guarantees a more precise determination of taxable use. The inquiry is into real economic use, assessed by the observable features and commercial reality of the business; it is not confined to physical use or whether one activity is merely ancillary to another.

A floorspace method cannot meet that standard where it treats hospitality and entertainment areas as exclusively taxable although they are significantly used to support exempt gaming. A tribunal must address such a central dual-use contention and give reasons for rejecting it. For capital goods, the restriction for gratuitous business entertainment applies before the remaining input tax is apportioned between taxable and exempt supplies.

HMRC appealed from the First-tier Tribunal’s decision allowing Hippodrome Casino Ltd’s claims to recover residual input VAT through a floorspace standard method override. The First-tier Tribunal had found that the override was a fairer and more precise proxy than the turnover-based standard method under the Value Added Tax Regulations 1995.

HMRC contended that the bars, restaurant and theatre had significant dual economic use: they made taxable hospitality and entertainment supplies but also supported the exempt gaming business. It also challenged the treatment of business entertainment in capital goods scheme adjustments. The central questions were whether the First-tier Tribunal had addressed the dual-use issue and whether the proposed floorspace method guaranteed a more precise measure of economic use than the standard method.

1. HMRC’s appeal was allowed. The First-tier Tribunal’s decision was set aside for a material error of law. It had not addressed or given reasons for rejecting HMRC’s central contention that the hospitality and entertainment areas were also used economically for exempt gaming. Its conclusion that those activities were not merely amenities for gaming did not resolve whether there was material dual use.

2. The relevant inquiry is the real economic use of residual inputs, assessed against the commercial reality and observable features of the business. It is not confined to physical use, and no separate test asks whether taxable activity is merely ancillary to exempt activity. A sufficient direct and immediate link may exist with more than one output supply.

3. The turnover-based method in Regulation 101 is the default. The taxpayer seeking an override bears the burden of showing that its proposed method guarantees a more precise result. The tribunal need decide the proposed method, rather than devise a third calculation.

4. Remaking the decision, the Upper Tribunal found significant dual use. The bars, restaurant, theatre and terraces provided amenities, competitive advantage and increased dwell time for gaming customers. The hospitality and entertainment businesses were unprofitable during the relevant period, which was relevant, though not determinative, evidence of their economic use in supporting gaming.

5. The floorspace method was critically flawed because it assumed exclusive taxable use of those areas and attributed unallocated general space in the same ratio. It did not guarantee a more precise allocation than turnover. HCL’s underlying appeals against HMRC’s refusal of the override were dismissed.

6. For capital goods scheme adjustments, Article 5(1) of the Value Added Tax (Input Tax) Order 1992 first excludes input tax attributable to gratuitous business entertainment. The remaining input tax is then apportioned under the standard method.

• Upper Tribunal (Tax and Chancery Chamber): HMRC’s appeal was allowed. The Tribunal set aside the First-tier Tribunal decision and dismissed HCL’s underlying appeals.
• First-tier Tribunal (Tax Chamber): allowed HCL’s appeals against HMRC’s refusals of its floorspace standard method override claims: [2022] UKFTT 110 (TC).