The Court of Appeal has handed down its judgment in the Hippodrome Casino case, dismissing the taxpayer’s appeal and upholding the decisions of both the Upper Tribunal and HMRC.
The case concerns the method for recovery of residual input VAT in the casino where parts of the space were used for taxable activities (restaurants and bars) and VAT exempt gambling activities with no input tax deduction.
The restaurants and bars, in addition to conference spaces and a theatre, were a major selling point to attract visitors to the casino.
Hippodrome argued the actual economic use of its overhead expenditure in making both taxable and exempt supplies, based on a floor-space method (i.e. calculate the deductible amount based on the % of floors so used), differs substantially from the attribution prescribed by the standard method which is based on turnover.
As such, the casino is required to undertake a standard method override calculation to determine its recoverable VAT. By using a floor space apportionment, this resulted in increased VAT recovery when compared to the standard method of apportionment.
HMRC disagreed with this implying that the proposed floor space override does not represent a more fair or reasonable result for the economic use of the overhead expenditure than that calculated under the standard method.
The Court of Appeal, dismissed on all grounds the case, and affirmed the Upper Tribunal decision in finding the casino’s method imprecise and therefore upholding the standard method. The judges reaffirmed that the standard method is the statutory default, and the onus is firmly on the taxpayer to demonstrate a fair and reasonable alternative method.
What this Means for Businesses
The Hippodrome Casino decision is a reminder that partial exemption remains one of the more complex areas of VAT and that courts are reluctant to move away from the legislative default, without compelling evidence and justification.
While this case turns on the specific facts of a casino and entertainment venue, the underlying principles will apply across all sectors which see a mixture of exempt and taxable income. This decision further supports that the standard method prevails, and the taxpayer can only ‘displace’ the standard method if an alternative method provides a more precise outcome. Further, the burden of proof is on the taxpayer to evidence how it is more precise and the form and weight of that evidence will likely be key in negotiations with HMRC.
Businesses considering a special method should proceed with caution and seek professional advice before making changes to any partial exemption method.
How the Xeinadin VAT Advisory can support your business
Our VAT team is here for you if you’d like to discuss the potential implication of this decision on your business. We can support businesses who are seeking to obtain a special method with HMRC, ensuring that this is a fair and reasonable method and liaise with HMRC to discuss any special method.
Your Xeinadin client manager can refer you to our specialist VAT Advisory team for support or you can email us on [email protected] to discuss this further.
