Partial exemption: standard method replaced

In Hippodrome Casino Ltd v HMRC [2022] TC8441, the First Tier Tribunal (FTT) allowed the standard method of attributing VAT between taxable and exempt supplies to be replaced by an alternative method. Attribution of Input VAT relating to premises costs was allowed based on utilised floorspace.

• Hippodrome Casino Limited (HCL) was a Partially Exempt business as it made taxable supplies of hospitality and entertainment as well as exempt gaming supplies.
• HCL provided a wide range of services including gaming facilities, eight bars, a restaurant with a celebrity chef, meeting rooms, conference facilities and a theatre.
• HCL claimed Partial Exemption. It claimed that overhead expenditure should be apportioned between taxable and exempt supplies based on the floor space utilised by each activity rather than the standard method which is based on the turnover created by each respective supply.
• HMRC contended that HCL’s method does not give a more reasonable apportionment than the standard method.
• HCL appealed to the FTT.

The Law

EC regulations, on which domestic UK legislation is based, dictate that where input VAT is incurred on a combination of taxable and exempt supplies, only input VAT on the former is deductible.

The standard method for calculating the deductible proportion is based on the turnover of the respective activities.

However, the standard method may be overridden if an alternative method gives a 'more reliable' attribution of the input VAT between the two types of supply and the difference between the methodologies is substantial.

The FTT found that a floorspace based apportionment was a more appropriate methodology for calculating the input tax attributable to taxable and exempt supplies as:

• The specific fact pattern signified that the alternative method was appropriate.
• HMRC’s contention that all of the arms of the business were not separately distinguishable was dismissed as:
  • Crossover between activities was limited, restaurant customers given free casino chips disrupted regular gamers and only a limited number of theatre-goers used the gaming facilities.
  • Separate strands of the business should be viewed separately, capital expenditure was not just to promote the casino or create an atmosphere for gamers, it was to promote and gain additional income from the theatres, bars and restaurants within the complex.
  • These additional activities were not just supplementary to the gaming.
• The difference between the methodologies was substantial.
• Attributing input VAT based on a floor space apportionment was also an appropriate apportionment for the Capital Goods Scheme.

UPDATE: HMRC have been granted permission to appeal to the Upper Tribunal. Listed for hearing on 3, 4 and 5 October 2023.

Useful guides on this topic

Partial exemption & input VAT
How do you calculate the amount of input tax you can recover under the VAT partial exemption rules? What are the de minimis rules?

Input VAT: What constitutes a valid VAT invoice
What needs to be included on a VAT invoice? Can you claim back VAT without an invoice? What evidence do you need to claim input VAT? A valid VAT invoice is required to reclaim input VAT. HMRC have the discretion to allow defective invoices. 

Capital Goods Scheme
What is the VAT Capital Goods Scheme (CGS)? When do I use it? How does it work?

External links

Hippodrome Casino Ltd v HMRC [2022] TC8441