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Floorspace Partial Exemption Special Method. Is it permissible?

Updated: Jun 21


Our VAT Analyst, Michael Lowe, reviews the First Tier Tax Tribunal for Hippodrome Casino.


Hippodrome Casino v The Commissioners for Her Majesty’s Revenue and Customs


The First Tier Tribunal decision involved Hippodrome Casino Limited (HCL) and its floor space Partial Exemption Special Method (PESM). HCL provided standard rated supplies of hospitality and entertainment and exempt gaming supplies. The premises consists of three casinos, multiple bars, restaurants and a theatre.


The argument put forward by the appellant was that the standard method of apportionment HCL were using did not equate to a fair and reasonable result for the appellant. The Hippodrome argued that a floor space apportionment would result in a fair result for both parties.


HMRC contended that HCL’s proposed floor space apportionment, in this scenario, did not represent a more fair and reasonable proxy for HCL’s economic use of its overhead expenditure than that calculated under the standard method.


Regulation 101 of the Value Added Tax Regulations 1995 (1995/2518) makes provision for the standard method of attribution of input tax and Regulation 107B of the Value Added Tax Regulations 1995 (1995/2518) sets out circumstances in which the standard method may be overridden. When an attribution substantial differences from the standard method, it can be applied as long as it is fair and reasonable, in accordance with s26 (3) of the Value Added Tax Act 1994. In determining whether the method adopted is a more reliable proxy for use of overhead costs than the standard method, the calculation not need be the most precise possible but it must be able to guarantee a more precise result than the standard method.


Although the deduction of residual input tax depends on the economic use of VAT bearing overheads it would appear from authorities, that such use might be accurately measured by means of physical proxy, such as floor-space apportionment, particularly when overheads are substantially property related.


HCL’s SMO Method

There are five elements to HCL’s method under reg. 107B for the recovery of its residual input tax. These are;

  1. An allocation of floor space to:

  2. Taxable supplies (Hospitality and Entertainment)

  3. Exempt supplies (Gaming)

  4. Neither taxable nor gaming supplies (Other areas)

  5. The hospitality area is then adjusted to take account of the areas for the provision of complimentary food and drink.

  6. The theatre is then adjusted to take account of its occasional use for poker tournaments.

  7. A percentage is then derived from; Adjusted area allocated to Taxable Supplies/Area allocated to taxable and exempt supplies

  8. That recovery percentage is then applied to all of HCL’s residual costs, including all residual costs related to other areas and all non-property related residual costs.

Applying this method there is a substantial difference between HCL’s SMO and the standard method. The reason for this substantial difference is that the exempt activities take up much less room than the standard rated activities. For example, an electronic roulette terminal, which sits on a space of 1.2 square meters, has a turnover of £400,000 a year. By contrast a table which takes up a similar space in the Heliot Steak House, which is used by 2 people and requires a bar, kitchen and point-of-sale machine, which takes up a further 115 square meters, has a turnover of £50,000 per year. Considerably less.


The judgement concluded that, having regard to all circumstances, the supplies of entertainment and hospitality from discrete and defined areas of the Hippodrome by HCL cannot be regarded as merely and adjunct to, or an amenity for, gaming. Judge John Brooks also considered that the general space is used to serve the building as a whole and therefore follows that it is appropriate to consider its use in the same way. It was also accepted that gaming generates higher turnover per square foot than hospitality.

As such, the appeal was allowed as the floor space method provided a fair, reasonable and precise proxy of its economic use of its overhead expenditure than the standard method.


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