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No win for partially exempt casino in VAT case

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A casino that made VATable supplies of hospitality and entertainment, and exempt supplies of gaming, tried its luck on the standard method override based on floor space.

13th Mar 2024
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Calculating the amount of VAT that can be recovered by a partially exempt business is often a challenge, and can cause lots of headaches. The upper tribunal case of Hippodrome Casino Limited (HCL) looked at the VAT treatment of purchases with dual use, and the impact of the standard method override.

The standard method override

It is a fundamental principle of VAT that VAT on costs can only be recovered to the extent to which it relates to making onward VATable supplies.

Where a cost is incurred that relates to both exempt income and VATable income (known as residual input VAT) a proportion of that VAT can be recovered. Common examples are telephone bills and property costs, which relate to the business as a whole, rather than to one particular income stream.

The default position, if no special method is agreed with HMRC, is the standard method, which looks at VATable supplies as a proportion of total supplies. This means, for example, that where 40% of your sales are VATable, you can recover 40% of the residual input VAT.

Where the standard method does not give a fair and reasonable result based on actual use, and the difference is substantial, the standard method override applies and the calculation is based on use.

A difference is substantial if it exceeds £50,000 or 50% of the residual input tax incurred and £25,000.

Partially exempt

HCL made VATable supplies of hospitality and entertainment, and exempt supplies of gaming, and so was partially exempt.

The bar and restaurant areas were seen as significant attractions for gaming customers, as was the theatre. While some guests did come just to use those facilities, it was estimated that 70% of customers came for gaming purposes.

The case concerned the dual use of hospitality and entertainment areas.

HCL had proposed a standard method override based on floor space and HMRC refused it.

Fundamentally flawed

HMRC submitted that the bar, restaurant and entertainment areas were used by HCL not only for making VATable supplies, but also as important amenities for HCL’s exempt gaming business.

They argued that the floor space method used by HCL was fundamentally flawed because it proceeded on the false premise that the bars, restaurants and entertainment areas were used only for the purpose of making VATable supplies. The economic reality was that these areas had dual use as they were also used to support and promote gaming.

Las Vegas-style

The intention was for the Hippodrome to be different from other casinos in the area and to provide a Las Vegas-style experience. This included live gaming, higher- and lower-stake gaming machines, electronic gaming, eight bars, a restaurant, private dining, meeting rooms, conference areas and a theatre.

The supplies made by HCL comprise three business activities: gaming, hospitality and entertainment. In addition to charging for supplies, HCL also makes complimentary supplies of food and drink to some of its most valued customers.

Visitors to the Hippodrome could enjoy most of the bars and restaurants without taking part in gaming activities but the gaming business was found to be the principal/core part of HCL’s business. Nevertheless, the bars, smoking terraces, restaurant and theatre provide important amenities to gaming customers. Gamblers are encouraged to take breaks from gaming and there is a mandatory requirement for casinos to have non-gambling areas.

Dual-use hospitality

The hospitality areas are included in promotional material, to try to attract gamblers to HCL.

However, neither the hospitality nor the entertainment part of the business was profitable in its own right.

The tribunal concluded: “Costs incurred in the hospitality and entertainment areas from which taxable supplies are made are also costs incurred to make non-taxable gaming supplies in other areas. Therefore, some of these costs are being used to make non-taxable supplies.

“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.”

As such, the floor space method used by HCL was “critically flawed” and HMRC was right to reject it.

Replies (5)

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By FactChecker
13th Mar 2024 19:54

Showing my ignorance/naivety, but I kept stopping at the sentence: "HCL made VATable supplies of hospitality and entertainment, and exempt supplies of gaming, and so was partially exempt."

On what possible basis is gambling (sorry 'gaming') an essential activity/service?

FWIW, yes I follow the arguments and result of the case above - but it only arose because of the need to relate the split of input tax across the VATable/exempt activities ... and I'm back again to exempt?!?

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Replying to FactChecker:
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By BrianL
14th Mar 2024 09:47

Good morning
I don't think that essentiality comes into it. There is an HMRC list of exempt goods and services, which seems to me to be arbitrary. For example, "Antiques, works of art or similar (as assets of historic houses) sold by private treaty to public collections" and "Visits to zoos" are exempt.

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Replying to FactChecker:
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By Diletante
14th Mar 2024 10:14

It is a misconception that an activity or service has to be 'essential' in order to be exempt from VAT. In the UK, betting and gaming falls within the exemption. This includes the provision of any facilities for the placing of bets or for the playing of any game of chance for a prize. And so, the attribution of residual input tax between taxable and exempt supplies continues to be a testing area for partially exempt businesses.

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Replying to FactChecker:
RLI
By lionofludesch
14th Mar 2024 10:57

FactChecker wrote:

On what possible basis is gambling (sorry 'gaming') an essential activity/service?

If gambling was standard rated, on what value would you charge VAT? The stake or the margin? How would you deal with winnings? Would the punter need to register for VAT?

It's impractical. That's why gambling has duties rather than VAT and why insurance, which is basically betting that your house will burn down (or whatever risk you cover), has IPT.

Folk ask the wrong questions about VAT. They whitter on about whether Jaffa Cakes are cakes or biscuits when they should be asking why chocolate covered cakes are zero rated.

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By FactChecker
14th Mar 2024 16:01

With thanks to all who have responded but, for the avoidance of doubt, when I said "On what possible basis is gambling (sorry 'gaming') an essential activity/service?" I was making a cheap moralistic (and slightly tongue-in-cheek) gibe at the sector.

* I was well aware that "There is an HMRC list of exempt goods and services, which seems to me to be arbitrary" ... and I concur that it seems arbitrary (although I'm sure that there will have been a specific reason for each one at the time).

* And I understood that "It is a misconception that an activity or service has to be 'essential' in order to be exempt from VAT" ... although I wasn't suggesting that was the criteria used in practice (making a perhaps too subtle allusion to its origin as a replacement for PT that was itself described by past Chancellors, not always accurately, as a 'tax on luxury goods and services').

Lion's view of it being VAT-exempt as a pragmatic solution (sort of, but not consistently, replaced by GBD and Gaming Duty) sounds plausible ... although I'd have thought the problems identified are no more insurmountable than the proliferation of conditions applied to other areas of VAT.

Anyway, I guess I've unintentionally misled people due to my moralistic dislike of all forms of gambling - and FWIW yes that does include Insurance, the Futures market, and many other areas with which most people are happy.
But I definitely concur with Lion's parting shot re: ".. asking why chocolate covered cakes are zero rated"!

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