VAT & Hippodrome
In an important decision, the Court of Appeal has sided with HMRC regarding the application of Partial Exemption Special Methods (PESM).
The decision in Hippodrome Casino vs HMRC carries important implications for businesses supplying both taxable and exempt services, particularly in the hospitality and gaming sectors. However, the principles apply broadly to any partially exempt business considering a special method for VAT recovery.
Partial exemption refers to the VAT recovery rules that apply to businesses making both taxable and exempt supplies. Since VAT on purchases related to exempt activities cannot usually be reclaimed, businesses must use a method, often based on turnover or usage, to apportion their input tax. Only the portion attributable to taxable supplies can be recovered. HMRC allows standard methods but businesses can propose alternatives if they more accurately reflect the use of goods and services. It is on this last point where the dispute focused.
The case
Hippodrome Casino operates a prominent entertainment venue in London, in which they offer a mix of both taxable and exempt supplies. The casino had proposed a floor area-based method allocating income tax based on clearly defined areas of the casino.
The Hippodrome were successful at FTT, however, the Court of Appeal have sided with HMRC that the method was flawed. They concluded that the FTT had made a material legal error by failing to properly consider the dual use of certain areas, specifically, that the bars, restaurants, and entertainment spaces were not used solely for taxable supplies (like food and drink), but also served as amenities supporting the exempt gaming business.
HMRC’s successful argument was that the economic reality was more complex than the casino’s proposed method suggested, with the floor area method assuming exclusive use for taxable activites and ignoring how these areas attracted and retained gaming customers. Ultimately, the Court found that there was substantial dual use of the bar, restaurant, and theatre areas, such as providing complimentary food and drink to high-value customers, which the special method failed to account for.
Ultimately, the Court of Appeal concluded that as the proposed method did not demonstrate a more accurate reflection of economic use than the standard income-based method, then it could not be used.
Key Takeaways
‘Dual Use’ matters: Businesses must rigorously assess whether areas used for taxable supplies also support exempt activities.
Holistic scrutiny: The Court reinforced that alternative methodologies, like floorspace apportionment must be clearly more accurate than the standard method, not just preferable.
This underpins the care that must be taken by partial exempt businesses, especially those with PESMs. At VITA, we have extensive experience supporting partially exempt businesses across various sectors and would be happy to help.
