The Court of Appeal has dismissed an appeal by a casino company against a ruling that it had failed to show that apportioning VAT on overhead costs by reference to floor space gave rise to a fairer and more reasonable result than the standard, turnover-based method.
As well as exempt supplies of gambling services, the company also made taxable supplies of hospitality and entertainment in the casino's bars, restaurants and theatre. It had a number of overhead costs, such as rent, marketing and security, which were not directly attributable to either taxable or exempt supplies. It argued that the standard method of calculating the residual input VAT recoverable did not give rise to a fair and reasonable result. It proposed a standard method override under Regulation 107B of the Value Added Tax Regulations 1995, based on the floor space allocated to taxable and exempt supplies. The difference amounted to nearly £3.3 million in VAT over six tax years.
HM Revenue and Customs (HMRC) refused the proposed floor space method. After two internal reviews upheld HMRC's refusal, the company appealed to the First-tier Tribunal (FTT). Allowing the company's appeal, the FTT found that the floor space method provided a more fair, reasonable and precise proxy of the company's economic use of its overhead expenditure than the standard method.
HMRC successfully appealed to the Upper Tribunal (UT). The UT found that the FTT had erred in failing to address HMRC's argument that there was dual use of the hospitality and entertainment areas, in that they were also used to make gambling supplies. Remaking the decision, the UT held that the company had not shown that the floor space method provided a more precise measure of use than the standard method.
Ruling on the company's appeal against the UT's decision, the Court rejected its contention that, read fairly, it was clear from the FTT's decision that it had grappled with HMRC's arguments on dual use. Nowhere in the FTT's judgment was there any analysis of HMRC's case that the floor space method was flawed because it proceeded on the basis of exclusively taxable use of the restaurants, bars and theatre whereas the economic reality was of dual use, supporting the gambling side of the business as well as making taxable supplies. In the Court's judgment, the UT had been correct to find a material error in the FTT's decision and to set it aside.
Considering whether the UT had been right to remake the decision in HMRC's favour, the Court rejected the company's argument that it should have started by considering the suitability of the standard method. The starting point was the company's proposed method based on floor space, and the question was whether that method led to a more precise outcome than the standard method. The UT had held that the company had failed to displace the standard method as being less precise than the floor space method. It had identified the correct issue and approached that issue correctly. The appeal was dismissed.