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HMRC Prevails: Upper Tribunal's Ruling on Floorspace-Based Special Method Override

Robin Prince · February 9th 2024 · read

Las Vegas Casino Building

The Upper Tribunal has ruled in favour of HMRC in its appeal of the First-tier Tribunal decision in Hippodrome Casino Limited v HMRC concerning the use of a floorspace based special method override.

In an unusual judgement, the UT ruled that the First-tier Tribunal had made a material error in law in failing to address the core issue of dual use. It therefore set aside the First-tier Tribunal decision together with its findings of fact.


Hippodrome Casino Limited (HCL) provides a ‘Las Vegas style’ experience, offering a casino, restaurants, theatre, and bars all in one venue. Most customers came to the Hippodrome for gaming, but a significant amount (circa 30%) came just for the restaurant, bars and theatre and did not enter the casino.

It was not disputed that HCL made both taxable supplies, and exempt supplies and that a partial exemption method was required to determine the attribution of overhead expenditure.

HCL contended that the use of the standard method did not fairly reflect the economic use of input tax. HCL submitted that the use of a floorspace based method more fairly reflected economic use and provided a result that differed substantially from the standard method.

HMRC contended that the hospitality areas had a dual use and were used to attract and retain customers for the Casino. HMRC stated that this was supported by the fact that hospitality was pursued even though it was unprofitable. HMRC, therefore, asserted that the floorspace method did not reflect economic use of the input tax.

Decision of the Upper Tribunal

In remaking the decision, the UT applied the approach set out in VWFS that the use of a Standard Method Override must guarantee a more precise determination of the deductible proportion of input tax.

The UT did not accept that the hospitality and entertainment areas were independent offerings. The UT found that HCL made economic use of these areas to attract gaming customers and to encourage them to stay longer. The fact that neither the hospitality nor entertainment businesses were profitable for the entire period in question was relevant in coming to this decision, but not determinative.

The Court also accepted HMRC’s argument that the SMO was distortive as it assumed that the unallocated floorspace (which formed the majority of the premises) was used in the same proportion as the exempt and taxable areas.

The Court therefore found that the floorspace SMO was fundamentally flawed and dismissed HCLs appeal.

The UT also disallowed HCL’s appeal in relation to the interaction of CGS calculation and the restriction of non-business input tax recovery.


The Court held that a SMO can only be applied when it guarantees a more precise recovery than the standard method. In doing so the UT has held that it has significantly less jurisdiction in appeals relating to standard method over-rides than it does in relation to Special Method over-rides.

While there is force in HMRC’s arguments, one wonders whether the ‘dual use issue’ will come back to haunt them. There are many examples, particularly in financial services, where HMRC have historically restricted recovery on costs by allowing recovery only by reference to the immediate exempt use and ignoring other taxable use. This ruling on the need to consider ‘dual use’ may see the reopening of previously closed disputes.

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