Hippodrome Casino Ltd v The Commissioners for HMRC [2025] EWCA Civ 1259

[2025] EWCA Civ 1259Case No CA-2024-000806
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM
THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
UPPER TRIBUNAL JUDGES RUPERT JONES and VINESH MANDALIA
[2024] UKUT 00027 (TCC)
Venue Royal Courts of Justice, Strand, London WC2A 2LLDate 6 October 2025
Before
LORD JUSTICE NEWEY LADY JUSTICE ASPLINLADY JUSTICE WHIPPLE
Between
HIPPODROME CASINO LTDAppellantTHE COMMISSIONERS FOR HIS MAJESTY'S REVENUE AND CUSTOMSRespondent
Andrew Hitchmough KC and Ronan Magee (instructed by PricewaterhouseCoopers LLP) for AppellantMatthew Donmall (instructed by General Counsel and Solicitor to His Majesty’s Revenue and Customs) for RespondentHearing Hearing dates: 24 and 25 June 2025
Approved JudgmentThis judgment was handed down remotely at 10.30am on [06.10.25] by circulation to the parties or their representatives by e-mail and by release to the National Archives.…………………
[1]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.[2]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.[3]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.[4]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.

Facts

[5]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.[6]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”.[7]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.[8]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.

Legal Framework

[9]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.

EU law

[10]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.[11]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

[12]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”.[13]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 …”
[14]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.[15]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. …”

Domestic Law

[16]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.[17]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).[18]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.[19]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”.[20]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.”
[21]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.[22]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).[23]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.[24]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

[25]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.[26]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).[27]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’s Proposed Floorspace Method

[28]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.[29]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.[30]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: Year Total Overhead VAT £ Recoverable under SMO (£) Recoverable under Standard Method (£) Difference (£) 2012-13 1,629,304.28 870,054.37 276,981.73 593,072.64 2013-14 1,677,077.82 859,198.01 218,020.12 641,177.89 2014-15 1,232,885.61 648,707.29 172,603.99 476,103.30 2015-16 1,361,765.19 520,900.90 163,411.82 357,489.08 2016-17 1,705,065.27 815,620.23 221,658.49 593,961.74 2017-18 1,803,814.70 846,011.02 216,457.76 629,553.26[31]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.

Decision of the FtT

[32]The FtT heard HCL’s appeals on 24-28 January 2022, giving its decision on 22 March 2022.[33]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.[34]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.”
[35]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).

Decision of the UT

[36]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).[37]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.”
[38]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).[39]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).[40]HCL’s appeal was dismissed and the decisions of HMRC upheld (para 211).

Issues

[41]HCL now appeals to this Court, advancing four grounds of appeal which I summarise: i) The UT erred in its approach. In particular, it wrongly contrasted allegations of inadequacy of reasoning with allegations of lack of reasoning and was wrong to conclude that the FtT had failed to engage with HMRC’s dual use argument or give sufficient reasons for its conclusions on dual use. ii) Having set aside the FtT’s decision and embarked on remaking the decision for itself, the UT erred in law by failing to analyse the suitability of the standard method based on turnover, which analysis should have been undertaken without regard to HCL’s proposed floorspace method. The UT was wrong to start with HCL’s floorspace method. iii) The UT erred in disregarding the evidence about the proportion of HCL’s customers who came to the Hippodrome but did not gamble (approximately 30%). The UT should have been persuaded by this evidence, amongst other evidence, that the standard method would not reflect the true economic use of HCL’s overheads. iv) The UT erred in its approach to and application of the Input Tax Order.[42]The first three grounds overlap extensively, and have at their core two issues: i) Was the UT right to set aside the decision of the FtT on grounds of material error? This is, in essence, the first ground of appeal. ii) If so, was the UT right to remake the decision in favour of HMRC? This involves, in essence, determining the second and third grounds of appeal as those have been developed in argument.[43]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?[44]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.[45]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.[46]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.[47]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.”
[48]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.[49]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.”
[50]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.[51]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).[52]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.[53]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.[54]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.[55]I would reject ground 1. Issue 2: was the UT right to remake the decision in favour of HMRC? Submissions

Issue 2: was the UT right to remake the decision in favour of HMRC?

[56]HCL does not any longer contend that the floorspace method provides a more reliable or accurate proxy for use than the standard method (although that had been its case in the FtT and UT). Instead it argues that the UT started in the wrong place by looking at the floorspace method; it should have started by considering the suitability of the standard method, without any need of comparison with any other method at that stage. A two-stage process was required: first to decide whether there was a problem with the standard method on the evidence available; and secondly, if there was, to address the likely solution and give guidance about it if not satisfied of the SMO proposed. On that approach, Mr Hitchmough argues that the UT should have concluded that the standard method failed to give rise to a fair and reasonable result. If it was not satisfied that the floorspace method was the most appropriate alternative, it should have provided guidance to the parties as to what would be an appropriate method, alternatively given the parties the opportunity to make further submissions on that issue. Mr Hitchmough cited a number of authorities where courts and tribunals have been flexible in allowing further argument about a trader’s partial exemption method.[57]Mr Hitchmough further argued that the UT should have concluded that the standard method was not a reasonable proxy for use of the residual inputs in HCL’s case, in particular given the evidence that 30% (approximated at times to a third) of customers at the Hippodrome did not gamble. That piece of evidence demonstrated that a significant proportion of customers came for non-gambling reasons, and could be expected to consume taxable supplies while at the Hippodrome. The UT had been wrong to dismiss this evidence as irrelevant (see para 195 of the UT’s decision). He argued that a method should now be devised which combined footfall (including the non-gambling customers) with turnover.[58]Mr Hitchmough invited this Court to set aside the decision of the UT as wrong in law, and either determine the appeal itself or remit this appeal to a differently constituted UT with directions. Whichever forum decided the appeal, the two-stage approach was required. At the second stage, if that was reached, HCL should be permitted to advance its revised case combining footfall and turnover into a single calculation.[59]Mr Donmall disagreed and argued that the UT was right to focus on HCL’s proposed alternative floorspace method to determine whether it gave rise to a more precise determination of the economic use of the inputs in question than the standard method; this was to follow the Baumarkt test as it was reiterated in VWFS and to do what was required by regulation 107B. He further submitted that the standard method cannot be considered in isolation but should be considered by comparison with some other method: the question for the tribunal is which of the standard method or the other method more accurately identifies the economic reality of how the inputs are used? The standard method is the default method under the Principal VAT Directive and until it is displaced by some other method, it can be taken to give rise to a fair and reasonable recovery of residual input tax. There is no analogy to be drawn with cases involving a special method override notice (or SMON), because the context of a special method (or a notice overriding a special method) is different: a special method is agreed between the taxpayer and HMRC but by contrast the standard method is established in the legislation as the default.[60]Mr Donmall further submitted that in light of HCL’s abandonment of its floorspace method, the UT was obviously right to allow this appeal. The tribunals are not required to offer rolling reviews or offer guidance. This appeal posed a binary question as to which method achieved a more precise result. If HCL’s method did not achieve a more precise result, that was the end of the case because it meant that the standard method remained in place. The cases on which HCL relied were set in different contexts and were irrelevant to this appeal.[61]Finally, Mr Donmall argued that the UT was entitled to reject as irrelevant the evidence that one third of the customers do not gamble. The UT’s reasons were sound but in any event this evidence, and the UT’s conclusions about it, were not material to the UT’s remade decision in HMRC’s favour. Discussion (1): Where to start?[62]Regulation 107B, which establishes the standard method override, applies “where a taxable person has made an attribution under [the standard method] and that attribution differs substantially from one which represents the extent to which the goods and services are used by him or are to be used by him … in making taxable supplies” (emphasis added). It is clear from the language of this regulation that a comparison is required between the standard method and the other method proposed.[63]Determining the extent to which goods or services are used or to be used for taxable purposes is not a perfect science: see, for example, the reference in VWFS to the method guaranteeing a “more precise” determination (para 51); see also Dial-a-Phone Ltd v Commissioners of Customs and Excise [2004] EWCA Civ 603 where it was held, in the context of attributing input tax to given outputs, that “the quest is not for the closest link, but for a sufficient link” (para 74 per Jonathan Parker LJ). It follows that the comparative exercise is focussed on establishing which method is more precise, accepting that there is likely to be some approximation in the outcome on either method and that perfection is not required.[64]The standard method is the default method: see Article 174 of the Principal VAT Directive and regulation 101(2). It can only be displaced by another method which gives rise to a more precise result (Baumarkt and VWFS). The comparison is therefore weighted: the standard method prevails unless it is displaced. I agree with Mr Donmall and the UT that the standard method, established by the Principal VAT Directive and enshrined in domestic law, can be relied on as giving a result which is fair and reasonable (even if a bit rough and ready). It will only be displaced if the alternative proposed is more precise in its outcome.[65]In this case, the UT had every reason to start with HCL’s SMO and ask whether it gave rise to a more precise result than the standard method. I can do no better but repeat the UT’s direction to itself:
“122. Here, the Tribunal is concerned with the … question as to whether the SMO contended for guarantees a more precise determination of the deductible proportion of the input VAT than that arising from the application of the turnover-based method. The SMO must be able to guarantee a more precise result than the result which would arise from the application of the turnover-based method. 123. The standard method is the default method, based on the value of supplies (Regulation 101(2)(d)) and by definition will provide for a fair and reasonable deduction based on the use or intended use of purchases. Permission is not needed to use it. … It is therefore for the taxpayer to displace the standard method.”
[66]The UT summarised its approach, in my view correctly, in this passage:
“126. The focus of the appeal must therefore be on the proposed method, with the taxpayer bearing the burden of proof to establish that the SMO guarantees a more precise determination than the standard method. The standard method is the lawful and mandated method of apportionment up until the point that it is determined that a proposed method displaces it. In our judgment the starting point is therefore to consider whether or not the test set out in VWFS is met. If it is, then the standard method is displaced and the SMO applies. If it is not, then the standard method continues to apply.”
[67]The starting point was HCL’s proposed method based on floorspace. The question was whether that method led to a more precise outcome than the standard method.[68]The UT held that the floorspace method was not a more precise measure of use than the standard method (para 180) and that HCL had failed to displace the standard method as being less precise than its proposed floorspace method (para 181). It accepted HCL’s SMO was “critically flawed” (para 186) and distortive (para 191).[69]The UT identified the correct issue and approached that issue correctly. There was no error of law.[70]In this case, where HCL’s proposed alternative method was challenged by HMRC as fundamentally flawed, it was particularly important to start with an analysis of that proposed alternative special method to decide whether it was even capable of giving rise to a fair and reasonable result.[71]Mr Donmall suggested that in SMO cases, where the standard method is the default, it is always necessary to start with an analysis of the SMO method, as the proposed alternative. I do not think that is an invariable rule. There may be cases where tribunals for good reasons start in a different place or prefer to look at both methods side by side in order to compare them. Those are matters for the tribunals to decide as matters of case management and procedure, always keeping the legislation and the Baumarkt test in clear view.[72]In this case, the tribunal was right to start with HCL’s proposed alternative. That alternative was challenged by HMRC on grounds that it was inherently flawed and incapable of yielding a fair and reasonable result. If HMRC was right, that really was the end of the case, because HCL’s method could not give rise to a more precise outcome than the standard method and the latter prevailed by default. (2): Is the door still open for further argument?[73]HCL argues that the door should have been left open for further argument by the UT if it was not persuaded by the floorspace method put forward in the SMO. HCL relies on a number of decisions where the tribunals have been flexible in permitting further argument on the appropriate partial exemption method, even at an advanced stage of the appeal.[74]The first is Vision Express (UK) Ltd v Revenue and Customs Commissioners [2009] EWHC 3245 (Ch), [2010] STC 742, where the taxpayer had agreed a partial exemption special method with HMRC. HMRC served a SMON on the taxpayer, signifying HMRC’s view that the agreed special method did not give rise to a fair and reasonable result; that SMON was accompanied by an assessment for the difference. The Value Added Tax Tribunal upheld the SMON and the assessment in principle but left it open to the parties to apply for a further hearing to determine the method of calculation of any tax now due. The taxpayer appealed to the Chancery Division. McCombe J described the tribunal’s management of the appeal in this way:
“54. … It is clear to me that the tribunal made no findings on the subject against which any appeal would lie; it seems that their view was that, if the parties could not agree upon a method of calculation, the matter would have to be determined at the further hearing for which they gave permission to the parties to apply.”
He dismissed the appeal.[75]As will be apparent, Vision Express was a case about a trader with a special method who received a SMON and an assessment reflecting that SMON. The tribunal (and the High Court) upheld the SMON on the basis that the originally agreed special method did not give rise to a fair and reasonable result. But the tribunal made no findings about the fairness of HMRC’s proposed alternative method and it was that issue which was reserved for further argument. This case involves a dispute about the standard method; and in this case, the UT has found flaws in HCL’s alternative method, which means that by operation of law the standard method is undisplaced. The two cases are very different.[76]The second case is St John’s College v Revenue and Customs Commissioners [2010] UKFTT 113 (TC). In that case the taxpayer had agreed a special method with HMRC which allowed a flat rate of deduction. The taxpayer then incurred a large amount of input tax on refurbishment work and served a SMON containing an alternative method of calculation on HMRC. That SMON allowed greater recovery of the input tax on refurbishment. The FtT held that a complete revising of the method was required (para 147) but that there was insufficient evidence to enable the FtT to make a precise calculation (para 148). It said this:
“150. However we have reached conclusions different from those advocated by either of the parties. In order to put our conclusions into practice and to consider what input VAT should be allowable, further evidence not originally expected by either party may be necessary. In such circumstances we do not believe it would be fair to determine the appeal merely by finding that, because the onus was on the Appellant to set aside the Respondents’ computation, that onus had not been discharged. We therefore adjourn the appeal on this issue with leave for the parties to seek a further hearing to settle it.”
The FtT went on to give guidance about the sort of method which would be suitable (para 151).[77]As is apparent, St John’s is a special method case too. The problem in St John’s was that there was inadequate evidence to enable the tribunal to determine the appropriate special method. That is very different from this case where the standard method applies by default.[78]Finally, HCL relies on Revenue and Customs Commissioners v General Motors (UK) Ltd [2015] UKUT 605 (TCC), [2016] STC 985. That case was not about partial exemption at all but rather (to the extent that Mr Hitchmough suggests it is relevant) about the methodology used to establish the extent of a taxpayer’s overpayment on self-supplies of cars. It was in that context that the UT (Henderson J and Judge Sinfield) said this: [68] The FTT were not, however, confined to choosing whether to accept or reject [GMAC’s] model in its entirety. So far as they could properly do so, it was their duty (applying their own expertise as a specialist tribunal) to ascertain the true amount of VAT (if any) which GMUK had overpaid. This result could be achieved either by the FTT performing the appropriate calculations itself, or by stating the principles by reference to which they considered the calculation should be made. In performing this task, the FTT had to act with procedural fairness, and there had to be a proper evidential foundation both for their findings of fact and for their conclusions. But their preferred solution did not have to be one for which either side had specifically contended, either before or in the course of the hearing.[79]I accept that Vision Express and St John’s are examples of appeals being adjourned to permit further argument on the appropriate special method; I note, however, a suggestion to the contrary in St Helen’s School Northwood Ltd v Revenue and Customs Commissioners [2006] EWHC 3306 (Ch), [2007] STC 633, where Warren J held that it was not for the tribunal to put forward its own version of a more reasonable special method (para 27). GMAC is a completely different case, which does not touch on partial exemption methods at all. None of these cases touch on the situation we have here, of a taxpayer seeking to displace the standard method by means of a SMO. I was shown no example of a tribunal adjourning this sort of case to allow for further argument.[80]I would accept the possibility that there might be standard method / SMO cases where a tribunal or court might wish to adjourn or reserve certain matters for argument on a later occasion; that might extend to permitting further evidence to be adduced on a variation of the SMO originally proposed. That is a case management decision for the tribunal or court on the day. But I can see no basis for suggesting in this case that the UT was required to adjourn for further argument, with a view to permitting fresh evidence to be adduced to meet different arguments. In this case, the taxpayer had historically used the standard method. The standard method is the default method. HCL had failed to displace the standard method. So the standard method stayed in place. It was, in those circumstances, appropriate for the UT simply to dismiss the appeal.[81]That conclusion is reinforced by Revenue and Customs Commissioners v Temple Finance Ltd [2017] UKUT 315 (TCC), [2017] STC 1781, a case on which the UT relied. In that case, a partially exempt taxpayer (TFL) had calculated its residual input tax recovery on the basis of the standard method. HMRC challenged that by SMO. The FtT allowed TFL’s appeal, holding that the standard method gave rise to a fair and reasonable recovery. HMRC challenged that conclusion arguing that the FtT had been in error in asking itself whether it preferred TFL’s approach (based on the standard method) or HMRC’s approach (based on the SMO); rather, the FtT should have considered first whether the SMO applied and if it did, then consider HMRC’s calculations and if those calculations were not fair and reasonable, impose its own use-based calculation. The UT (Judges Sinfield and Falk) rejected that submission:
“60. We do not agree. Only two methods were before the FTT, TFL’s and HMRC’s. The FTT was not required to make its own enquiry as to whether there might be another method that was preferable. As Lord Carnwath said in the Supreme Court’s decision in VWFS [2017] UKSC 26, [2017] STC 824 (at [7]), where the parties are substantial litigants represented by experienced counsel the tribunal ‘is entitled to assume that the parties will have identified with some care what they regard as relevant issues for decision’.”
[82]I am not persuaded that the UT was in error in allowing HMRC’s appeal with the effect of retaining the standard method for the periods in question by way of final disposal of this appeal. In this case, the options really were binary.[83]In any event, the arguments now raised by HCL with a view to devising an alternative method based on footfall combined with turnover are very vague and completely different from the floorspace method put forward in the SMO. This amounts, effectively, to starting all over again. To permit that would be a highly unorthodox route for a tribunal to take, with many pitfalls, as Mr Donmall pointed out. (3): What about the evidence of non-gambling customers?[84]Having determined the appeal against HCL, the UT went on to consider what the outcome might have been on a different (and incorrect) hypothesis – namely that the burden lay on HMRC to satisfy the UT that the standard method guaranteed a more precise result. The UT held that it would have been satisfied of that (para 193). The UT gave a number of reasons for that conclusion, including the passage now challenged by Mr Hitchmough, in which the UT said this: “We have found that a third of customers do not gamble and that is a physical proxy for the economic use but it is not a good proxy for economic use when gambling customers are spending considerably more - floorspace or customer numbers do not more fairly reflect economic use” (para 195).[85]Mr Hitchmough says that the UT wrongly assumed here a turnover analysis -when the correctness of turnover as a proxy for use was the very issue to be determined - and overlooked evidence about the percentage of non-gambling customers, which evidence demonstrated the weakness of the standard method.[86]I do not accept that the UT was at fault in this passage. The UT was only stating its view that gambling customers would be expected to spend more, on the whole, than non-gambling customers. That would be a relevant observation to make in the context of the turnover-based standard method, which the UT had by this point applied.[87]But in any event, this comment is not part of the UT’s central reasoning and is not material to the conclusions the UT had already reached in HMRC’s favour.[88]I agree with the UT’s view that numbers of non-gambling customers are not a good proxy for use. Footfall alone tells us little; non-gambling customers may come and go quickly or they may linger and consume large amounts of drink, food and entertainment: it all depends on the specifics, of which the evidence is lacking.

Summary on this issue

[89]I reject HCL’s second and third grounds of appeal. I am not persuaded that the UT started in the wrong place or was required to leave the door open for further argument. I think the UT was right simply to allow the appeal once it had concluded HCL’s floorspace method was discredited, which meant that the standard method applied by default. The UT was entitled to find that the standard method led to a fair and reasonable recovery of residual input tax, as a matter of law (because the standard method is the default) and on the specific facts of this case. The burden was on HCL to show otherwise and it failed to do that. Evidence about the percentage of non-gambling customers was insubstantial and did not detract from that conclusion. Issue 3: how does the Input Tax Order apply in the context of residual input tax apportionment?

Introduction

[90]There is no dispute between the parties that part of HCL’s input tax in the relevant periods relates to complimentary food and drink provided by HCL to its customers, and that Article 5 of the Input Tax Order applies to restrict recovery to the extent that input tax relates to business entertainment. The UT labelled this the “CGS issue” because the point was raised in the context of annual CGS adjustments of input tax relating to refurbishment costs. However, the issue is broader than that and involves the interplay of the standard method and Article 5.[91]The UT was asked for a decision in principle only because the detailed exercise of identifying precisely how much input tax, in which years, is affected by this issue has not yet been undertaken. That remains the case before this Court. Since the hearing of this appeal, the Court has been provided with an illustration of the rival cases. It is based on input tax figures for 2013/14 which is not a period within this appeal, so far as this issue is concerned. It also assumes that all business expenditure is for exempt purposes based on the FtT’s finding that HCL’s business expenditure was predominantly for gaming customers; but that leaves an important aspect of HCL’s case untested. So, useful though it is as a worked example, I will not incorporate it into this judgment.

Submissions

[92]The issue is essentially one of timing of the deduction. Mr Magee (who argued this point for HCL with commendable focus) submits that the restriction does not occur at the outset. Rather, this is the sequence, as he would have it: section 24(1) VATA defines input tax; section 25(2) confers the right to a credit for input tax to the extent that input tax is allowable under section 26; section 26(1) provides that the credit equates to the amount of input tax which is attributable to supplies within section 26(2); section 26(2) provides that those are taxable supplies (and other categories of supply which are not relevant here); section 26(3) provides for regulations to secure a fair and reasonable attribution of input tax to taxable supplies; regulation 101(2) of the VAT Regulations sets out the standard method of attribution and by operation of that method, the proportion of input tax due for credit pursuant to section 25(2) is established. It is at that point that the taxable person is required to restrict input tax incurred on business entertainment, namely, at the point that the taxable person knows the amount of input tax credit which they are otherwise due for that period and after input tax which is not allocated to taxable supplies has already fallen out of the equation. He argues that the Input Tax Order bites on the credit due under section 25, and that credit is for input tax allocated to taxable activity. This is not a block on input tax so much as restriction of the amount to be credited. As to the practicalities of how the amount of restriction is to be identified, Mr Magee submits that if any input tax was used for business entertainment for taxable purposes, it is necessary, once this point is reached, to conduct a “commercial apportionment” to determine how much of the credit figure must be restricted under Article 5(1). The restriction only bites on input tax referable to business entertainment for taxable purposes because on his argument all input tax referable to business entertainment for exempt activity has already been taken out.[93]The practical consequence for HCL is that input tax on complimentary food and drink for gambling customers (who consume exempt services) is not subject to any separate restriction; only the proportion of input tax on complimentary food and drink provided free of charge to non-gambling customers (who might be expected to consume taxable supplies) is restricted and in HCL’s case that is only a small amount – birthday drinks for restaurant customers and such like.[94]Mr Magee draws support from two authorities. First, he cites Revenue and Customs Commissioners v Associated Newspapers Ltd [2017] EWCA Civ 54, [2017] STC 843 for the proposition that a taxable person’s ultimate economic purpose in making expenditure can be relevant, noting that in that case the cost of acquiring vouchers which the taxpayer gave away to customers for free was held to be a cost component of the taxable business overall, by reference to the ultimate business purpose rather than the proximate and non-taxable onward supply of the vouchers (see paras 47 and 48). The second is Thorn EMI plc v Customs and Excise Commissioners [1995] STC 674 where the Court held that an apportionment between business and non-business use of inputs was required, to reflect the use to which hospitality chalets at an airshow were used, and to reflect their main use for business entertainment alongside use to a measurable extent for other business purposes (see p 676d and p 679 e-g).[95]By contrast, HMRC argue that the restriction applies as a single step at the outset of the calculation, once the pot of residual tax is identified but before it is apportioned by operation of regulation 101(2). HMRC argue that this achieves the self-evident purpose of Article 5 which is to block input tax on business entertainment. HMRC illustrate their case with the following example (which they put before the UT also): assume a partially exempt trader incurs residual input tax of £30,000; in the relevant period, that trader makes taxable supplies worth £1,000, exempt supplies worth £1,000 and provides gratuitous business entertainment worth £1,000. On HMRC’s case, one third of that input tax is restricted at the outset as referable to business entertainment, leaving £20,000 in the pot to be apportioned by the following fraction: taxable supplies (£1) as a proportion of taxable and exempt supplies (as the denominator, £1+£1=2). The consequence is that the trader recovers £10,000 of input tax, which is proportionate to the value of taxable outputs in that period and is (HMRC contends) the right answer. HMRC suggest that on HCL’s argument the trader would recover £15,000 which would exceed what is fair and reasonable.[96]In response, HCL accepts that, to the extent that some business entertainment input tax was used for taxable purposes, there would have to be some further restriction on the £15,000 in the example, that amount to be determined by a “commercial method”. Mr Magee does not indicate what that commercial method might look like or how the restriction applying in this example might be quantified. Mr Magee disputed Mr Donmall’s example as flawed because it is based on the turnover method, which begs the very question to be answered.

Discussion

[97]Mr Donmall’s example does not beg the question to be answered. The UT has decided that the standard method applies. I have agreed with that conclusion. It is appropriate for Mr Donmall to use an example based on turnover to illustrate the rival cases about how Article 5 of the Input Tax Order should work and show why HMRC’s approach is preferable.[98]The UT held that HCL’s approach “has the effect of ignoring the use for free business entertainment entirely, and in effect renders the Input Tax Order nugatory in any partial exemption situation” (para 210). This was on the basis, as the UT appears to have understood HCL’s case, that no restriction would be made to reflect taxable use. On that understanding, the UT was right to say that HCL’s argument rendered the Input Tax Order meaningless.[99]It was made clear in this Court that HCL accepted (and had always accepted) that an adjustment to reflect taxable use was required. But I am still not persuaded that HCL’s approach is correct. Article 5 of the Input Tax Order restricts recovery of input tax on business entertainment without reference to the purpose for which that entertainment is provided. It imposes a restriction on all input tax to the extent that the underlying goods or services are used for business entertainment, regardless of the ultimate purpose of that expenditure. I can see no mandate, within Article 5, to look through the provision of business entertainment to its ultimate objective and ask what the business entertainment was for.[100]Neither case relied on by Mr Magee supports HCL’s case. Associated Newspapers did not concern the Input Tax Order at all and is not relevant. Thorn EMI raised a different question under the Input Tax Order, about how to divide inputs which were used for business purposes from those used for non-business purposes. The answer to that question was that a business/non-business split under section 24(5) VATA was required; that is not the same question as raised in this case and that provision does not assist here.[101]Further, HCL’s analysis adds a layer of complexity to the operation of the Input Tax Order where it applies in the context of the standard method. That complexity goes against the grain of the standard method which is aimed at simplicity. Further, it creates uncertainty about what the “commercial method” might look like and how it might operate; it sounds to me very much like a mini-special method plugged into this standard method calculation. I am not persuaded that is what was intended.[102]I agree with HMRC that the better analysis is that Article 5 imposes a once-only restriction on the pot of residual input tax at the point that the pot has been identified and before the standard method workings are applied.[103]Although I differ in my reasons, possibly because the argument was presented differently before this Court, I agree with the UT on this issue and dismiss ground 4.

Conclusion

[104]For those reasons, I reject HCL’s case and would dismiss this appeal.[105]I agree.[106]I also agree.