Value added tax - Input tax - Claim for deduction of input tax

London Clubs Management Ltd v Revenue and Customs Commissioners: Court of Appeal, Civil Division (Lord Justices Ward, Etherton and Pitchford): 18 November 2011

The taxpayer company was a representative member of a VAT group containing a number of companies. The group was ultimately owned by a United States casino group, which, inter alia, ran a number of casinos in the United Kingdom. Until 2007, the taxpayer used a modified turnover partial exemption special method (PESM) in relation to a residual input tax claim for VAT on its business.

The fact that the vast bulk of its turnover derived from gaming, an exempt activity, was reflected in the allocation of residual input tax resulting in recovery of a small proportion of it. However, in 2007, the taxpayer proposed a new PESM, focusing on a floor based measure of use and overheads. That change was made as a result of the taxpayer attempting to target customers who attended casinos solely to access food, beverage and entertainment facilities without participating in any gaming. That resulted in recovery of a higher proportion of residual input tax.

The existing PESM was similar to the standard method in that it provided for recovery of residual input tax based on turnover. However, it was not the standard method because it made special provision for food and drink supplied free of charge to certain gaming customers. It was therefore a PESM for the purposes of regulation 102 of the Value Added Tax Regulations 1995, SI 1995/2518 (the 1995 regulations). The issues before the First-tier Tribunal (the tribunal) were whether the new PESM fairly and reasonably represented the taxpayer's use of residual VAT bearing inputs and, if so, whether the new PESM represented that use more fairly and reasonably than the existing PESM.

The tribunal decided both issues in favour of the taxpayer. The Revenue and Customs Commissioners (the revenue) appealed against the tribunal's findings. The Upper Tribunal (Tax and Chancery Chamber) (the UT) dismissed the appeal. It held that the tribunal had been correct to find that the new PESM had provided a fair and reasonable proxy and that that had been a more fair and reasonable proxy for the use of costs than the existing PESM.

The revenue appealed to the Court of Appeal. The revenue argued that the UT, having accepted that an essential part of its approach was to assess the economic use made by the taxpayer of its residual costs, failed to make a proper assessment of economic use and misunderstood the required approach. The revenue further argued that the UT had made general errors in its assessment of the decision of the tribunal’s decision which vitiated its holding that the proposed PESM resulted in a fair and reasonable attribution of residual input tax and/or that the result of the proposed method was more fair and reasonable than the existing method. The appeal would be dismissed.

Neither the tribunal nor the UT had erred in law. The revenue's criticisms were levelled principally at the reasoning of the tribunal, but there were no grounds for disturbing the tribunal's decision. The revenue's criticism that the tribunal had failed to properly compare the existing method and the proposed PESM in order to see whether the proposed PESM would be more reasonable was plainly wrong: the tribunal had been well aware of the correct approach and had followed it in its reasoning.

Further, the tribunal had made a finding of fact that the taxpayer's catering activities, although not profitable at the relevant time, were none the less businesses in their own right, and were not merely ancillary to the gaming business. That finding was that the catering activity was a potential source of profit and carried on as such, independent of the taxpayer's gaming activity. That finding meant it was impossible to say the tribunal's decision had been erroneous in law. There were no grounds for interfering with that finding, so the tribunal's, and hence the UT's decision, could not be disturbed (see [68]-[69], [77]-[78] of the judgment).

Customs and Excise Comrs v Yarburgh Children's Trust [2001] All ER (D) 419 (Nov) considered; Dial-a-Phone Ltd v Customs and Excise Comrs [2004] All ER (D) 297 (May) considered; Banbury Visionplus Ltd v Revenue and Customs Comrs [2006] All ER (D) 105 (May) considered; St Helen's School Northwood v Revenue and Customs Comrs [2006] All ER (D) 316 (Dec) considered; Royal Bank of Scotland Group Plc v Revenue and Customs Comrs: C-488/07 [2008] All ER (D) 218 (Dec) adopted; Procter & Gamble UK v Revenue and Customs Comrs [2009] All ER (D) 177 (May) considered; Revenue and Customs Comrs v Loyalty Management UK Ltd: C-53/09 and C-55/09 [2010] All ER (D) 98 (Oct) considered. Decision of Proudman J [2010] All ER (D) 123 (Nov) affirmed.

Alison Foster QC and Richard Smith (instructed by Zwennes Revenue and Customs) for the revenue; Andrew Hitchmough and Jonathan Bremner (instructed by BDO Stoy Hayward) for the taxpayer.