Hippodrome Casino Ltd v The Commissioners for HMRC

For residual input tax used in making both taxable and exempt supplies, the turnover-based standard method is the default. Under the Value Added Tax Regulations 1995, it may be displaced only by an alternative method that guarantees a more precise determination of the deductible proportion. The taxpayer bears the burden of proving that the alternative is more precise. A tribunal is not generally required to devise or invite argument on a different method once the proposed method fails and the standard method remains applicable. The business-entertainment restriction in the Value Added Tax (Input Tax) Order 1992 operates once on the residual input-tax pot before the standard-method calculation, irrespective of the ultimate purpose of the entertainment.

Hippodrome Casino Ltd operated a casino and related hospitality and entertainment businesses. It sought to replace the statutory turnover-based method for allocating residual input tax with a floorspace method under the Value Added Tax Regulations 1995. The First-tier Tribunal allowed its appeals. The Upper Tribunal set that decision aside for failure to address HMRC’s dual-use case and remade the decision in HMRC’s favour: [2024] UKUT 00027 (TCC). HCL appealed on the adequacy of the First-tier Tribunal’s reasoning, the proper approach to displacement of the standard method, evidence concerning non-gambling customers, and the application of the business-entertainment restriction. The central questions were whether the Upper Tribunal erred in setting aside and remaking the decision, and how the restriction applied to residual input tax.

1. Appeal dismissed. The Upper Tribunal was entitled to set aside the First-tier Tribunal’s decision. The First-tier Tribunal had failed to engage with HMRC’s central argument that the bars, restaurant and theatre had dual economic use and that the proposed floorspace method assumed exclusively taxable use. This was an absence of decision and reasons on a material issue, rather than a permissible challenge to the adequacy of reasoning or factual evaluation. The distinction from London Clubs Management Ltd [2011] EWCA Civ 1323 was material because that case involved different arguments and an unchallenged finding that catering was independently carried on.
2. Regulation 107B of the Value Added Tax Regulations 1995 requires a comparison between the standard method and the proposed alternative. The relevant inquiry is whether the alternative guarantees a more precise determination of the deductible proportion than the turnover-based method. Per Baumarkt [2013] STC 521 and Volkswagen Financial Services [2019] 4 WLR 32, perfection is unnecessary, but the alternative must produce a more precise result and objectively reflect economic use. The standard method is the statutory default and may be treated as fair and reasonable, however approximate, until displaced. The burden lay on HCL, which failed to discharge it.
3. There was no legal requirement for the Upper Tribunal to adjourn or invite a wholly new method after rejecting the floorspace method. Whether to permit further evidence or argument is a case-management decision. In the circumstances, the alternatives were effectively binary: the proposed method failed, so the standard method remained operative.
4. The evidence that approximately one third of customers did not gamble was not, without evidence about their use of the premises, a reliable proxy for economic use of residual inputs. In any event, the observation was not material to the Upper Tribunal’s central reasoning.
5. Article 5 of the Value Added Tax (Input Tax) Order 1992 restricts input tax to the extent that the underlying goods or services are used for business entertainment, without requiring an inquiry into the ultimate purpose of that entertainment. In a residual-input-tax case using the standard method, the restriction is made once the residual pot has been identified and before the standard-method apportionment. HCL’s proposed commercial apportionment was unsupported by the Order and unnecessarily complex. Grounds 2, 3 and 4 were rejected, and HMRC’s decisions were upheld.

• Court of Appeal (Civil Division): appeal dismissed; the Upper Tribunal’s decision was upheld.
• Upper Tribunal (Tax and Chancery Chamber): allowed HMRC’s appeal, set aside the First-tier Tribunal’s decision and remade the decision in HMRC’s favour: [2024] UKUT 00027 (TCC).
• First-tier Tribunal: allowed HCL’s appeals.