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

Issue 2: was the UT right to remake the decision in favour of HMRC?

Submissions

HCL does not any longer contend that the floorspace method provides a more reliable or accurate proxy for use than the standard method (although that had been its case in the FtT and UT). Instead it argues that the UT started in the wrong place by looking at the floorspace method; it should have started by considering the suitability of the standard method, without any need of comparison with any other method at that stage. A two-stage process was required: first to decide whether there was a problem with the standard method on the evidence available; and secondly, if there was, to address the likely solution and give guidance about it if not satisfied of the SMO proposed. On that approach, Mr Hitchmough argues that the UT should have concluded that the standard method failed to give rise to a fair and reasonable result. If it was not satisfied that the floorspace method was the most appropriate alternative, it should have provided guidance to the parties as to what would be an appropriate method, alternatively given the parties the opportunity to make further submissions on that issue. Mr Hitchmough cited a number of authorities where courts and tribunals have been flexible in allowing further argument about a trader’s partial exemption method.

Mr Hitchmough further argued that the UT should have concluded that the standard method was not a reasonable proxy for use of the residual inputs in HCL’s case, in particular given the evidence that 30% (approximated at times to a third) of customers at the Hippodrome did not gamble. That piece of evidence demonstrated that a significant proportion of customers came for non-gambling reasons, and could be expected to consume taxable supplies while at the Hippodrome. The UT had been wrong to dismiss this evidence as irrelevant (see para 195 of the UT’s decision). He argued that a method should now be devised which combined footfall (including the non-gambling customers) with turnover.

Mr Hitchmough invited this Court to set aside the decision of the UT as wrong in law, and either determine the appeal itself or remit this appeal to a differently constituted UT with directions. Whichever forum decided the appeal, the two-stage approach was required. At the second stage, if that was reached, HCL should be permitted to advance its revised case combining footfall and turnover into a single calculation.

Mr Donmall disagreed and argued that the UT was right to focus on HCL’s proposed alternative floorspace method to determine whether it gave rise to a more precise determination of the economic use of the inputs in question than the standard method; this was to follow the Baumarkt test as it was reiterated in VWFS and to do what was required by regulation 107B. He further submitted that the standard method cannot be considered in isolation but should be considered by comparison with some other method: the question for the tribunal is which of the standard method or the other method more accurately identifies the economic reality of how the inputs are used? The standard method is the default method under the Principal VAT Directive and until it is displaced by some other method, it can be taken to give rise to a fair and reasonable recovery of residual input tax. There is no analogy to be drawn with cases involving a special method override notice (or SMON), because the context of a special method (or a notice overriding a special method) is different: a special method is agreed between the taxpayer and HMRC but by contrast the standard method is established in the legislation as the default.

Mr Donmall further submitted that in light of HCL’s abandonment of its floorspace method, the UT was obviously right to allow this appeal. The tribunals are not required to offer rolling reviews or offer guidance. This appeal posed a binary question as to which method achieved a more precise result. If HCL’s method did not achieve a more precise result, that was the end of the case because it meant that the standard method remained in place. The cases on which HCL relied were set in different contexts and were irrelevant to this appeal.

Finally, Mr Donmall argued that the UT was entitled to reject as irrelevant the evidence that one third of the customers do not gamble. The UT’s reasons were sound but in any event this evidence, and the UT’s conclusions about it, were not material to the UT’s remade decision in HMRC’s favour.