CA-2024-000806 - [2025] EWCA Civ 1259

Discussion

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.

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.

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.

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.

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.

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.

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.