Hippodrome Casino Ltd v The Commissioners for HMRC

This appeal by Hippodrome Casino Ltd (“HCL”) was first heard by the First-tier Tribunal (Judge John Brooks and Sonia Gable JP) under references TC/2018/05373 and TC/2021/01140. The FtT allowed HCL’s appeal. The Commissioners for His Majesty’s Revenue and Customs (“HMRC”) appealed to the Upper Tribunal (Judges Rupert Jones and Vinesh Mandalia) in a judgment with the neutral citation number [2024] UKUT 00027 (TCC). The UT allowed HMRC’s appeal. HCL now appeals the UT’s decision to this Court with permission granted by Asplin LJ.

HCL invites this Court to set aside the UT’s decision as wrong in law and to decide the matter for itself, or remit the appeal to a differently constituted UT for that purpose. HMRC resist this appeal arguing that the UT’s decision discloses no error of law and should be upheld.

The appeal raises questions relating to the basis upon which HCL, which runs a casino in central London, can deduct “residual input tax” incurred by it on goods and services supplied to it for business purposes and used for making both taxable and exempt supplies. HCL’s main argument is that the “standard method” of input tax deduction does not give rise to a fair and reasonable result and must be substituted. HMRC dispute this and submit that the standard method gives rise to a fair and reasonable outcome but that, in any event, HCL has failed to put forward an alternative method which would more accurately reflect the use of the various inputs. If HMRC wins on the main issue, a subsidiary issue arises about the treatment of the input tax attributable to business entertainment (in the form of free food and drink provided to customers). This is essentially a point of construction of the relevant regulation, with HCL arguing that input tax on business entertainment is restricted by that regulation only to the extent that the business entertainment was for taxable purposes; HMRC take the view that the restriction bites on all input tax used for business entertainment, regardless of the ultimate purpose of the entertainment.

The appeal on the main issue about the partial exemption method relates to the tax years 2012/13-2017/19. The subsidiary issue about business entertainment input tax relates to the years 2016/17- 2018/19 only.

The facts are set out by the FtT at paras 32-97 of its decision. The following is a summary taken from those paragraphs. HCL runs a venue known as the “London Hippodrome” in central London. The building was opened in 1900 as an indoor circus. From 1909 it became a music hall. In 1958 it was converted into a dinner dance venue. Between 2003 and 2005 it operated as a nightclub. In 2005 it was purchased by HCL and after a period of refurbishment it reopened in 2012. HCL’s intention was for the Hippodrome to operate as a casino but to be different from its competitors by offering a “Las Vegas style” experience including entertainment in a luxury environment.

The Hippodrome has five floors. It has areas for live gaming, higher-stake and lower-stake gaming machines, electronic gaming, poker, eight bars, a restaurant, private dining or meeting rooms, conference and event areas, outdoor terraces, an entertainment and conference space, lounges and a theatre which at the time of the FtT appeal hosted the show “Magic Mike Live”.

Gaming is the principal activity of HCL but it also operates restaurants, bars and a theatre. The FtT noted that although under the applicable regulatory framework it is mandatory for casinos to have non-gambling areas (which must not consist exclusively of lobbies or lavatory areas) the non-gambling areas in the Hippodrome are much larger than is required.

HCL makes complimentary supplies of food and drink to some of its most valued customers. These are mostly gaming customers but complimentary food and drink is also given to non-gaming customers, for example restaurant customers on their birthday.

There is no dispute about the relevant law. At all times material to this appeal, the UK was a member of the European Union and EU law governed domestic VAT law.

Title X of Council Directive 2006/112/EC of 28 November 2006 (the “Principal VAT Directive”) deals with deductions. Chapter one of that title is headed “origin and scope of right to deduction”. Within that chapter, Article 168 provides that a taxable person is entitled to deduct input tax on goods and services used for the purposes of taxable transactions. Articles 169 and 170 extend that right of deduction to specific circumstances which are not in issue in this appeal.

Chapter two is headed “proportional deduction” and includes Articles 173 and 174 which direct the method by which the proportion of recoverable residual input tax is to be determined. Those articles are central to this appeal and provide, so far as relevant, as follows:

“Article 173

1.

In the case of goods or services used by a taxable person both for transactions in respect of which VAT is deductible pursuant to Articles 168, 169 and 170, and for transactions in respect of which VAT is not deductible, only such proportion of the VAT as is attributable to the former transactions shall be deductible.

The deductible proportion shall be determined, in accordance with Articles 174 and 175, for all the transactions carried out by the taxable person.

2.

Member States may take the following measures:

(a)

authorise the taxable person to determine a proportion for each sector of his business, provided that separate accounts are kept for each sector;

(b)

require the taxable person to determine a proportion for each sector of his business and to keep separate accounts for each sector;

(c)

authorise or require the taxable person to make the deduction on the basis of the use made of all or part of the goods and services;

(d)

authorise or require the taxable person to make the deduction in accordance with the rule laid down in the first subparagraph of paragraph 1, in respect of all goods and services used for all transactions referred to therein;

(e)

provide that, where the VAT which is not deductible by the taxable person is insignificant, it is to be treated as nil.

Article 174

1.

The deductible proportion shall be made up of a fraction comprising the following amounts:

(a)

as numerator, the total amount, exclusive of VAT, of turnover per year attributable to transactions in respect of which VAT is deductible pursuant to Articles 168 and 169;

(b)

as denominator, the total amount, exclusive of VAT, of turnover per year attributable to transactions included in the numerator and to transactions in respect of which VAT is not deductible.

Member States may include in the denominator the amount of subsidies, other than those directly linked to the price of supplies of goods or services referred to in Article 73.”

Article 174.1 contains a method based on turnover, which is known domestically as the “standard method”. That is the prescribed method (see Article 173.1) unless a different method is authorised or required, pursuant to the permissions in Article 173.2. A different method, which deviates from the standard method, is known as a partial exemption “special method”.

It is well-established in the case law of the Court of Justice of the EU that a taxable person can only use a special method “on condition that the method used guarantees a more precise determination of the deductible proportion of the input VAT than that arising from application of the turnover-based method”: see Case C-511/10 Finanzamt Hildesheim v BLC Baumarkt GmbH & Co KG EU:C:2012:689, [2013] STC 521, para 24. The same point was made in Case C-153/17 HMRC v Volkswagen Financial Services (UK) Ltd [2019] 4 WLR 32, where the Court cited para 24 of Baumarkt (at para 51) before saying this (with emphasis added):

“52.

Thus, any member state which decides to authorise or compel the taxable person to make the deduction on the basis of the use made of all or part of the goods and services must ensure that the method for calculating the right to deduct makes it possible to ascertain with the greatest possible precision the portion of VAT relating to transactions in respect of which VAT is deductible. The principle of neutrality, which forms an integral part of the common system of VAT, requires that the method by which the deduction is calculated objectively reflects the actual share of the expenditure resulting from the acquisition of mixed use goods and services that may be attributed to transactions in respect of which VAT is deductible: see Fazenda Pública v Banco Mais SA (Case C-183/13) EU:C:2014:2056; [2014] STC 2325, paras 30 and 31.

…

53.

In that regard, the court has nevertheless specified that the method chosen must not necessarily be the most precise possible, but that, as is apparent from para 51 of this judgment, it must be able to guarantee a more precise result than the result which would arise from the application of the turnover-based allocation key …”

It is further established that a fundamental criterion for the application of VAT, including the deduction of input tax used or to be used in making taxable supplies, is that of economic reality: see Joined Cases C-53/09 and C-55/09 Revenue and Customs Commissioners v Loyalty Management UK Ltd; Baxi Group Ltd v Revenue and Customs Commissioners [2010] STC 2651 at para 39. It follows, and is not in dispute, that any method by which input tax is apportioned to taxable supplies must reflect the economic reality, assessed objectively, of the use of the relevant inputs.

Article 176 imposes a restriction on the deduction of VAT incurred on business entertainment in the following terms:

“Article 176

The Council, acting unanimously on a proposal from the Commission, shall determine the expenditure in respect of which VAT shall not be deductible. VAT shall in no circumstances be deductible in respect of expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment.

…”

The main implementing legislation is the Value Added Tax Act 1994 (“VATA”). Section 24(1) defines input tax to include VAT on the supply to a person of goods or services. Section 26(1) confers on a taxable person the right to a credit for so much of the input tax incurred as is attributable to supplies within section 26(2), which includes taxable supplies (at section 26(2)(a)). Section 26(3) confers on HMRC the power to make regulations “for securing a fair and reasonable attribution of input tax to supplies within subsection (2)”. It is these regulations which are in issue in this case; they apply where the question is how to apportion input tax between taxable and exempt supplies.

Section 24(5) provides for an apportionment of input tax in a different scenario, where the input tax is used for both business and non-business purposes. That is not the issue in this case (but section 24(5) is relevant to one of the authorities relied on by HCL so I mentioned it here).

The regulations referred to in section 26(3) are the Value Added Tax Regulations 1995 (SI 1995/2518) (“VAT Regulations”). The main issue raised on this appeal depends on the regulations concerning the standard method and special methods.

Regulation 101 of the VAT Regulations sets out the “standard method” for deduction of input tax attributable to taxable supplies (this is a direct implementation of Article 174.1 of the Principal VAT Directive). Regulation 101(2) requires the following steps to be taken: (i) all input tax incurred is identified, (ii) input tax used exclusively in making taxable supplies is attributed to taxable supplies, (iii) input tax used exclusively in making exempt supplies is excluded, and (iv) the recoverable proportion of any residual input tax (as that term is defined, see next paragraph) is determined according to the following formula (set out at regulation 101(2)(d)):

“there shall be apportioned to taxable supplies such proportion of the residual input tax as bears the same ratio to the total of such tax as the value of taxable supplies made by him bears to the value of all supplies made by him in the period”.

Residual input tax is defined by regulation 101(10) to mean: “input tax incurred by a taxable person on goods or services which are used or to be used by him in making both taxable and exempt supplies.”

The standard method is subject to a “standard method override” (or “SMO”) in regulation 107B, which applies where a person has made a provisional attribution of input tax using the standard method, but (see regulation 107B(1)):

“… that attribution differs substantially from one which represents the extent to which the goods or services are used or to be used by him, or a successor of his, in making taxable supplies”.

In that event, regulation 107B(2) requires the taxable person to calculate and account for the difference.

A difference is substantial if it exceeds £50,000 or 50% of the input tax falling to be apportioned under regulation 101(2(d) but is not less than £25,000 (regulation 107C).

Under the permission contained in Article 173.2 of the Principal VAT Directive, regulation 102 permits HMRC to approve or direct the use of a “special method” for deduction of residual input. However, that approval or direction is subject to a system of notices which can be given, disputing the accuracy of deduction based on that special method. These are known as “special method override notices” or “SMONs”. HMRC can serve a SMON on the taxable person if they are satisfied that the overall result of the special method is an over-deduction of input tax (see regulation 102(11) and (12) of the VAT Regulations). In addition, HMRC can serve a SMON on the taxable person if they consider the special method “does not fairly and reasonably represent” the extent to which residual input tax is used or to be used in making taxable supplies (regulation 102A(1)), requiring the taxable person to account for the difference between the attribution made in a given accounting period, and an “attribution which represents the extent to which the goods or services are used by him or are to be used by him in making taxable supplies” (regulation 102B(1)). Regulation 102C permits the taxable person to serve a SMON on HMRC, if that taxable person is using a special method which does not fairly and reasonably represent the extent of taxable use.

The subsidiary issue depends on the construction and application of Article 5 of the Value Added Tax (Input Tax) Order 1992, SI 1992/3222 (“Input Tax Order”). That article is presaged in Article 176 of the Principal VAT Directive, but Mr Donmall very properly does not rely on the Directive in his arguments on the Input Tax Order, noting that there is some ambiguity about the extent of implementation of Article 176 so that, on one view, the Input Tax Order remains a provision of domestic law only. Article 5 of the Input Tax Order imposes a restriction on input VAT used for business entertainment, in the following terms:

“(1)

Tax charged on any goods or services supplied to a taxable person, or on any goods acquired by a taxable person, or on any goods imported by a taxable person, is to be excluded from any credit under [section 25] of the Act, where the goods or services in question are used or to be used by the taxable person for the purposes of business entertainment [unless the entertainment is provided for an overseas customer of the taxable person and is of a kind and on a scale which is reasonable, having regard to all the circumstances].

…

(3)

For the purposes of this article, “business entertainment” means entertainment including hospitality of any kind provided by a taxable person in connection with a business carried on by him, but does not include the provision of any such entertainment for either or both-

(a)

employees of the taxable person;

(b)

if the taxable person is a body corporate, its directors or persons otherwise engaged in its management,

unless the provision of entertainment for persons such as are mentioned in sub-paragraph (a) and (b) above is incidental to its provision for others.”

HCL’s supplies to its customers fall into different categories for VAT purposes. Supplies of services of gambling are exempt from VAT (under Group 9 of Schedule 4 to VATA). Supplies of hospitality in its bars and restaurants, and supplies of entertainment by means of tickets sold to shows in its theatre, are taxable at the standard rate of VAT. HCL is therefore a “partially exempt” trader.

HCL incurs input tax on goods and services purchased in and used for business purposes. To the extent that those goods or services are directly attributable to HCL’s taxable supplies, associated input tax can be reclaimed in full by HCL, see regulation 101(2)(b). To the extent that those goods or services are directly attributable to gambling supplies, associated input tax is irrecoverable, see regulation 101(2)(c). This appeal concerns input tax incurred by HCL which is not directly attributable to taxable or exempt supplies and is “residual” input tax, also sometimes referred to as input tax on “overheads”, as to which see regulation 101(2)(d).

The main sources of HCL’s residual input tax in the relevant periods are rent, building maintenance (including the cost of utilities and air conditioning), cleaning, marketing and security. HCL also incurred input tax on refurbishing the Hippodrome in the period prior to its opening in 2012; the associated input tax falls under the capital goods scheme (“CGS”) requiring an annual adjustment of deduction for 10 years.

HCL is entitled to recover its residual input tax on the basis of the “standard method” which is based on HCL’s turnover. The standard method takes the value of HCL’s taxable supplies over a given period as the numerator (the top number), and the value of HCL’s taxable and exempt supplies as the denominator (the bottom number). The resulting percentage represents the recoverable proportion.

However, HCL takes the view that the standard method does not give rise to a fair and reasonable result in its case. Before the FtT and the UT it argued that the better approach, which arrived at a fairer and more reasonable result, was to determine the recoverable percentage by means of a floorspace method, which involved assessing the floorspace allocated to hospitality and entertaining on the one hand, and the floorspace allocated to gambling on the other. The relevant recovery percentage applying that method was found by taking taxable floorspace (comprising the hospitality and entertainment areas) as the numerator (top number) over taxable and exempt floorspace (allocated to gambling) as denominator (bottom number). The method took no account of areas which are not allocated to any particular activity (for example, kitchens and common parts). HCL put its floorspace method forward by way of SMO under regulation 107B of the VAT Regulations.

The difference between the standard method for which HMRC argues and the floorspace method for which HCL argues is significant in money terms, as can be seen from the following table which was set out at para 99 of the FtT decision and reproduced at para 151 of the UT decision:

HMRC did not consider that HCL’s floorspace method produced a fair and reasonable result for the years in question (2012/13-2017/18). HMRC refused HCL’s proposed floorspace method for those periods (decision letters dated 18 January 2018 and 9 October 2020). HMRC upheld those decisions on internal reviews dated 11 July 2018 and 5 March 2021. HCL appealed.

The FtT heard HCL’s appeals on 24-28 January 2022, giving its decision on 22 March 2022.

HMRC rejected HCL’s floorspace method on the basis, recorded at para 108 of the FtT’s decision, that there was “dual use” of the areas which were allocated to hospitality and entertainment. That was to argue that the hospitality and entertainment areas – bars, restaurant and theatre – should not be allocated solely to taxable supplies because the economic reality was that they were used for making both taxable (hospitality and entertainment) and exempt (gambling) supplies.

The FtT dismissed HMRC’s arguments, saying at para 125:

“For the reasons above, and having regard to all the circumstances, we have come to the conclusion that, given their extent and nature, the supplies of entertainment and hospitality from discrete and defined areas of the Hippodrome by HCL cannot be regarded as merely an adjunct to, or an amenity for, gaming.”

The FtT held that the floorspace method provided a “more fair, reasonable and precise proxy of [HCL’s] economic use of its overhead expenditure than the turnover based [standard] method” and allowed HCL’s appeals (para 127).

HMRC was granted leave to appeal to the UT which heard the appeal on 3-4 October 2023 and delivered its decision on 29 January 2024. HMRC’s main argument on appeal was that the FtT had erred in rejecting without reasons the arguments based on dual use (para 4). HCL submitted that the FtT had adequately addressed HMRC’s dual use argument, indeed finding in favour of HCL on that issue (see paras 40 and 50). The UT held that the FtT had failed to address the issue of dual use (paras 63, 78 and 79) which was a material error of law which meant the FtT’s decision had to be set aside (paras 81 and 98).

The UT remade the decision, directing itself that the issue was whether the SMO for which HCL contended (based on floorspace) guaranteed a more precise determination of the deductible proportion of the residual input VAT than that achieved by the turnover-based standard method (para 122) and that the burden of proof was on HCL (para 126). It had regard to the findings of fact by the FtT (para 138) but also made additional findings based on the available evidence (para 139). The UT accepted HMRC’s case on the evidence and found that the areas allocated to hospitality and entertainment were also used economically for the gaming business in various ways (para 162); the hospitality and entertainment areas were not “independent offerings” that were entirely separate from the gaming, rather HCL made significant economic use of those areas for the purposes of its gaming supplies (para 170). It found that HMRC’s case on dual use was made out (para 173). This was its conclusion on the evidence:

“172.

Standing back and having considered the evidence before us holistically, we find that the economic reality is that the floor areas of the Hippodrome allocated for hospitality and entertainment have significant dual use for gaming as well. Most importantly, we find that the hospitality and entertainment areas were significantly used economically for the gaming business. That is, they were used to make all the supplies of the various strands of the business, both taxable supplies (hospitality and entertainment) and the exempt gaming supplies. The residual costs for these areas are also incurred in order to provide the necessary premises and facilities for carrying out the non-taxable strand to HCL’s business.”

The UT held that HCL had not shown that the floorspace method provided a more precise measure of use than the standard turnover method (paras 180 and 181) for reasons set out (paras 182-195). The number of non-gambling customers was not a good proxy for use (para 195). The standard method therefore applied (para 196).

The UT addressed the adjustment which was required by the Input Tax Order, restricting the recovery of input tax on business entertainment which included the provision of food and drinks free of charge to customers. That was not an issue which the FtT had addressed but it arose as a result of the UT’s conclusion that the standard method applied. The UT accepted HMRC’s arguments that the restriction to reflect business entertainment had to be made at the outset of the apportionment exercise. It rejected HCL’s opposing submission which would have given HCL a larger recovery in this case (para 207).

HCL’s appeal was dismissed and the decisions of HMRC upheld (para 211).

HCL now appeals to this Court, advancing four grounds of appeal which I summarise:

The first three grounds overlap extensively, and have at their core two issues:

The fourth ground is separate and arises only if the UT’s decision on the first two issues is upheld. It leads to the third issue: how does the Input Tax Order apply in the context of residual input tax apportionment under the standard method?

HCL was represented on this appeal by Andrew Hitchmough KC and Ronan Magee, who appeared for HCL in the FtT and the UT also. HMRC was represented by Matthew Donmall, who appeared for HMRC in the FtT and the UT also. It has been a considerable benefit to this Court to be addressed by the same counsel as have appeared throughout. All counsel, and their legal teams, have given substantial assistance to the Court through their detailed knowledge of the case and extensive experience in matters of VAT law. I am grateful to all of them.

It was HMRC’s case before the UT that the FtT had failed to address the dual use argument and that the central flaw in HCL’s alternative floorspace method was that it proceeded on the false premise that the areas allocated to taxable use, namely bars, restaurants and entertainment areas, were only used for the purposes of taxable supplies of hospitality and entertainment, whereas the economic reality was that these areas were used for both taxable and exempt supplies to support the gaming business. HMRC argued that it was against the evidence to view HCL’s gaming business as totally independent of the drinks, food and entertainment that was sold at the Hippodrome.

Before the UT, HCL argued that the FtT had posed itself the correct question of whether the proposed floorspace method adequately reflected the economic reality of how that space was used; that the answer to that question involved an evaluative fact sensitive exercise; and that the FtT had reached a conclusion which was open to it on the evidence with which the UT should not interfere. HCL relied on a number of well-known authorities to support its case that the UT should not interfere. HCL argued that there was no error of law by the FtT and that HMRC’s case amounted to a disagreement with the FtT’s conclusions on the facts. HCL argued, alternatively, that the FtT had accepted some degree of dual use in its findings and that HMRC’s criticisms of the FtT’s decision were unfounded.

Having summarised the rival arguments of HMRC and HCL on this issue, the UT reached its conclusion, against HCL, in the following paragraphs:

“60.

We accept that it is now well established from the authorities Mr Hitchmough refers to, set out above, that judicial caution and restraint is required when considering whether to set aside a decision of a specialist fact finding tribunal on the basis of a finding of fact or adequacy of reasons. In particular: The FtT alone is the judge of the facts. Its decisions should be respected unless it is apparent that the tribunal has misdirected itself in law. It is likely that in interpreting and applying the law in its specialised field, the tribunal will have got it right. Appellate tribunals should not rush to find errors of law simply because they might have reached a different conclusion on the facts or expressed themselves differently.

61.

Having said all that, we are satisfied that this ground of appeal is not a complaint regarding perverse or unreasonable findings of fact, evaluative judgments or adequacy of reasons given. This ground concentrates upon the FtT’s failure to address a central issue in the appeal and lack of reasons. …

63.

We are satisfied that, when the decision of the FtT is read as a whole, the FtT has failed to address or to engage with the case advanced by HMRC that there was dual economic use by which the bars, restaurant and theatre areas were also significantly used economically to support and promote gaming. It therefore failed to give any reasons for rejecting the core of the case advanced by HMRC and for reaching the decision that it did.”

Before this Court, and by ground 1, Mr Hitchmough argues that the UT was drawing a false distinction between the adequacy of reasons given on the one hand and an absence of reasons on the other (see para 61 of the UT, cited above). He says that HMRC’s case before the UT was, in truth, an attack on the adequacy of the FtT’s reasons and was a thinly disguised and impermissible attempt to go behind the FtT’s evaluation of the evidence. It followed that the UT had wrongly substituted its own decision on that fact-sensitive question at para 63. He reminded this Court that HCL had never argued that there was no dual use of these areas, rather the question had been the extent of such dual use, which was a value judgment for the FtT. Mr Hitchmough took the Court through the FtT’s decision, pointing to findings which he submitted were predicated on the existence of dual use; he said that, read fairly, it was clear that the FtT had grappled with HMRC’s arguments on dual use and had concluded that a floorspace method provided a more reliable proxy for use than the standard method based on turnover. He submitted that the UT’s interference with the decision of the FtT was unjustified. He drew on this Court’s decision in Revenue and Customs Commissioners v London Clubs Management Ltd [2011] EWCA Civ 1323, [2012] STC 388 (“LCM”). to support his arguments.

In response, Mr Donmall submitted that the UT was right for the reasons it gave. He reminded the Court that HMRC’s case on dual use had two elements to it: first, that there was a significant degree of economic use of bars, restaurants and entertainment areas for gaming; and secondly, and in consequence, the floorspace method was fundamentally flawed because it assumed exclusive use. Although the FtT had considered aspects of the first part of HMRC’s argument and had acknowledged dual use of some parts of the Hippodrome (eg restaurants and theatre), the FtT had not dealt with the use of bars, which were perhaps the most obvious dual use areas; nor had it engaged with the second part of HMRC’s case as to whether dual use rendered the floorspace method fundamentally flawed. HMRC’s case was different from the case advanced in LCM because HMRC was not arguing that the bars, restaurants and gaming areas were merely ancillary to the gaming supplies (as had been HMRC’s case in LCM), rather HMRC were relying on an argument of economic reality to the effect that those areas were used in large part to support the gaming part of the business and were for that reason “dual use”; the FtT had wrongly characterised HMRC’s argument in this appeal as being similar to the argument advanced by HMRC in LCM, a failing which was most obvious in the FtT’s conclusion at para 125 which tracked the wording and arguments in LCM but did not answer the points raised by HMRC in this case. Paragraph 125 of the FtT’s decision had been in the following terms:

“For the reasons above, and having regard to all the circumstances, we have come to the conclusion that, given their extent and nature, the supplies of entertainment and hospitality from discrete and defined areas of the Hippodrome by HCL cannot be regarded as merely an adjunct to, or an amenity for, gaming.”

I agree with HMRC. Despite Mr Hitchmough’s valiant efforts to stitch together fragments of the FtT’s decision into an analysis of the dual use argument, I am not persuaded that the FtT undertook that exercise at all. True it is that there are references in the FtT’s judgment to the gaming business crossing over with the restaurants and theatre (but, I note, not the bars), but nowhere in the FtT’s judgment is there any analysis of HMRC’s case that the floorspace method is flawed because it proceeds on the basis of exclusively taxable use of the restaurants, bars and theatre areas whereas the economic reality is of dual use, supporting the gambling side of the business as well as making taxable supplies of hospitality and entertainment. In other words, the second part of HMRC’s argument was not addressed.

The FtT appears to have made this mistake at least in part because it approached HMRC’s case as if it were an analogue of LCM – most clearly illustrated by its conclusion at para 125 cited above. However, LCM was a different case involving different arguments. In LCM the taxpayer ran a gambling business, involving casino games as well as restaurants, bars and entertainments. A significant percentage of food and drink was supplied free of charge to certain gaming customers. The taxpayer had agreed a special method with HMRC. The taxpayer proposed an alternative special method based on floorspace, which HMRC refused to accept leading to the appeal. The FtT found that the catering activities were businesses in their own right, and were not “merely ancillary” to the gaming business, and on that basis found for the taxpayer, holding that the proposed floorspace method was fair and reasonable, and indeed more fair and reasonable than the previously agreed special method. Before the UT and the Court of Appeal, HMRC challenged that conclusion, arguing that the economic reality was that the entire business was aimed at enabling gaming to be carried on and profit to be made from that activity, so that there was no independent catering business at all and a turnover based method was a reasonable proxy for use (see paras 61 and 62 of the Court of Appeal judgment where HMRC’s arguments are summarised). Etherton LJ, with whom the other members of the Court agreed, rejected HMRC’s challenge for reasons which are very particular to that case. He noted the FtT’s finding that the catering activity was carried on independently of the taxpayer’s gaming business (para 69), a finding which he thought was “remarkably benign” towards the taxpayer but which was not challenged as perverse (para 73), and held that such a finding of primary fact could not be disturbed by the appeal court (para 77). It followed that the appeal would be dismissed (para 79).

By contrast with LCM, in this case HMRC do not argue that the whole of HCL’s business was aimed at making a profit from gaming, nor that the bars and restaurants were merely ancillary, and it is no part of HCL’s case that the bar and restaurant activities were wholly independent of the gaming instead accepting a degree of dual use. The dispute in this case centres on the extent of that dual use and its impact on the floorspace method proposed by HCL. LCM does not help HCL in the resolution of that issue and the FtT was wrong to draw on LCM as heavily as it did.

In my judgment the UT was correct to find a material error in the FtT’s decision and to set the FtT’s decision aside for that reason. The UT directed itself correctly at paras 60 and 61. It did not draw a false distinction at para 61. The FtT had not addressed either of the aspects of the dual use argument advanced by HMRC satisfactorily. It had not addressed the second aspect at all. HMRC’s challenge was not to the adequacy of the FtT’s reasons but about the absence of a decision – and reasons - on the dual use point. The UT’s decision at para 63 was itself an evaluative one, considering the FtT’s decision as a whole and giving it a fair reading. This Court should in turn be slow to interfere with that conclusion. In my judgment, the UT correctly directed itself on the law and came to a conclusion which was open to it.

If the decision was mine to make afresh, because there was (against my conclusion in the preceding paragraph) some error of law in the UT’s approach, I would anyway come to the same conclusion as the UT did. I agree that the FtT failed to grapple with a central element of HMRC’s case and that the FtT’s decision must be set aside.

I would reject ground 1.

I agree.

I also agree.