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

Issues

HCL now appeals to this Court, advancing four grounds of appeal which I summarise:

The UT erred in its approach. In particular, it wrongly contrasted allegations of inadequacy of reasoning with allegations of lack of reasoning and was wrong to conclude that the FtT had failed to engage with HMRC’s dual use argument or give sufficient reasons for its conclusions on dual use.

Having set aside the FtT’s decision and embarked on remaking the decision for itself, the UT erred in law by failing to analyse the suitability of the standard method based on turnover, which analysis should have been undertaken without regard to HCL’s proposed floorspace method. The UT was wrong to start with HCL’s floorspace method.

The UT erred in disregarding the evidence about the proportion of HCL’s customers who came to the Hippodrome but did not gamble (approximately 30%). The UT should have been persuaded by this evidence, amongst other evidence, that the standard method would not reflect the true economic use of HCL’s overheads.

The UT erred in its approach to and application of the Input Tax Order.

The first three grounds overlap extensively, and have at their core two issues:

Was the UT right to set aside the decision of the FtT on grounds of material error? This is, in essence, the first ground of appeal.

If so, was the UT right to remake the decision in favour of HMRC? This involves, in essence, determining the second and third grounds of appeal as those have been developed in argument.

The fourth ground is separate and arises only if the UT’s decision on the first two issues is upheld. It leads to the third issue: how does the Input Tax Order apply in the context of residual input tax apportionment under the standard method?

HCL was represented on this appeal by Andrew Hitchmough KC and Ronan Magee, who appeared for HCL in the FtT and the UT also. HMRC was represented by Matthew Donmall, who appeared for HMRC in the FtT and the UT also. It has been a considerable benefit to this Court to be addressed by the same counsel as have appeared throughout. All counsel, and their legal teams, have given substantial assistance to the Court through their detailed knowledge of the case and extensive experience in matters of VAT law. I am grateful to all of them.

Issue 1: was the UT right to set aside the decision of the FtT on grounds of material error?

It was HMRC’s case before the UT that the FtT had failed to address the dual use argument and that the central flaw in HCL’s alternative floorspace method was that it proceeded on the false premise that the areas allocated to taxable use, namely bars, restaurants and entertainment areas, were only used for the purposes of taxable supplies of hospitality and entertainment, whereas the economic reality was that these areas were used for both taxable and exempt supplies to support the gaming business. HMRC argued that it was against the evidence to view HCL’s gaming business as totally independent of the drinks, food and entertainment that was sold at the Hippodrome.

Before the UT, HCL argued that the FtT had posed itself the correct question of whether the proposed floorspace method adequately reflected the economic reality of how that space was used; that the answer to that question involved an evaluative fact sensitive exercise; and that the FtT had reached a conclusion which was open to it on the evidence with which the UT should not interfere. HCL relied on a number of well-known authorities to support its case that the UT should not interfere. HCL argued that there was no error of law by the FtT and that HMRC’s case amounted to a disagreement with the FtT’s conclusions on the facts. HCL argued, alternatively, that the FtT had accepted some degree of dual use in its findings and that HMRC’s criticisms of the FtT’s decision were unfounded.

Having summarised the rival arguments of HMRC and HCL on this issue, the UT reached its conclusion, against HCL, in the following paragraphs:

We accept that it is now well established from the authorities Mr Hitchmough refers to, set out above, that judicial caution and restraint is required when considering whether to set aside a decision of a specialist fact finding tribunal on the basis of a finding of fact or adequacy of reasons. In particular: The FtT alone is the judge of the facts. Its decisions should be respected unless it is apparent that the tribunal has misdirected itself in law. It is likely that in interpreting and applying the law in its specialised field, the tribunal will have got it right. Appellate tribunals should not rush to find errors of law simply because they might have reached a different conclusion on the facts or expressed themselves differently.

Having said all that, we are satisfied that this ground of appeal is not a complaint regarding perverse or unreasonable findings of fact, evaluative judgments or adequacy of reasons given. This ground concentrates upon the FtT’s failure to address a central issue in the appeal and lack of reasons. …

We are satisfied that, when the decision of the FtT is read as a whole, the FtT has failed to address or to engage with the case advanced by HMRC that there was dual economic use by which the bars, restaurant and theatre areas were also significantly used economically to support and promote gaming. It therefore failed to give any reasons for rejecting the core of the case advanced by HMRC and for reaching the decision that it did.”

Before this Court, and by ground 1, Mr Hitchmough argues that the UT was drawing a false distinction between the adequacy of reasons given on the one hand and an absence of reasons on the other (see para 61 of the UT, cited above). He says that HMRC’s case before the UT was, in truth, an attack on the adequacy of the FtT’s reasons and was a thinly disguised and impermissible attempt to go behind the FtT’s evaluation of the evidence. It followed that the UT had wrongly substituted its own decision on that fact-sensitive question at para 63. He reminded this Court that HCL had never argued that there was no dual use of these areas, rather the question had been the extent of such dual use, which was a value judgment for the FtT. Mr Hitchmough took the Court through the FtT’s decision, pointing to findings which he submitted were predicated on the existence of dual use; he said that, read fairly, it was clear that the FtT had grappled with HMRC’s arguments on dual use and had concluded that a floorspace method provided a more reliable proxy for use than the standard method based on turnover. He submitted that the UT’s interference with the decision of the FtT was unjustified. He drew on this Court’s decision in Revenue and Customs Commissioners v London Clubs Management Ltd [2011] EWCA Civ 1323, [2012] STC 388 (“LCM”). to support his arguments.

In response, Mr Donmall submitted that the UT was right for the reasons it gave. He reminded the Court that HMRC’s case on dual use had two elements to it: first, that there was a significant degree of economic use of bars, restaurants and entertainment areas for gaming; and secondly, and in consequence, the floorspace method was fundamentally flawed because it assumed exclusive use. Although the FtT had considered aspects of the first part of HMRC’s argument and had acknowledged dual use of some parts of the Hippodrome (eg restaurants and theatre), the FtT had not dealt with the use of bars, which were perhaps the most obvious dual use areas; nor had it engaged with the second part of HMRC’s case as to whether dual use rendered the floorspace method fundamentally flawed. HMRC’s case was different from the case advanced in LCM because HMRC was not arguing that the bars, restaurants and gaming areas were merely ancillary to the gaming supplies (as had been HMRC’s case in LCM), rather HMRC were relying on an argument of economic reality to the effect that those areas were used in large part to support the gaming part of the business and were for that reason “dual use”; the FtT had wrongly characterised HMRC’s argument in this appeal as being similar to the argument advanced by HMRC in LCM, a failing which was most obvious in the FtT’s conclusion at para 125 which tracked the wording and arguments in LCM but did not answer the points raised by HMRC in this case. Paragraph 125 of the FtT’s decision had been in the following terms:

“For the reasons above, and having regard to all the circumstances, we have come to the conclusion that, given their extent and nature, the supplies of entertainment and hospitality from discrete and defined areas of the Hippodrome by HCL cannot be regarded as merely an adjunct to, or an amenity for, gaming.”

I agree with HMRC. Despite Mr Hitchmough’s valiant efforts to stitch together fragments of the FtT’s decision into an analysis of the dual use argument, I am not persuaded that the FtT undertook that exercise at all. True it is that there are references in the FtT’s judgment to the gaming business crossing over with the restaurants and theatre (but, I note, not the bars), but nowhere in the FtT’s judgment is there any analysis of HMRC’s case that the floorspace method is flawed because it proceeds on the basis of exclusively taxable use of the restaurants, bars and theatre areas whereas the economic reality is of dual use, supporting the gambling side of the business as well as making taxable supplies of hospitality and entertainment. In other words, the second part of HMRC’s argument was not addressed.

The FtT appears to have made this mistake at least in part because it approached HMRC’s case as if it were an analogue of LCM – most clearly illustrated by its conclusion at para 125 cited above. However, LCM was a different case involving different arguments. In LCM the taxpayer ran a gambling business, involving casino games as well as restaurants, bars and entertainments. A significant percentage of food and drink was supplied free of charge to certain gaming customers. The taxpayer had agreed a special method with HMRC. The taxpayer proposed an alternative special method based on floorspace, which HMRC refused to accept leading to the appeal. The FtT found that the catering activities were businesses in their own right, and were not “merely ancillary” to the gaming business, and on that basis found for the taxpayer, holding that the proposed floorspace method was fair and reasonable, and indeed more fair and reasonable than the previously agreed special method. Before the UT and the Court of Appeal, HMRC challenged that conclusion, arguing that the economic reality was that the entire business was aimed at enabling gaming to be carried on and profit to be made from that activity, so that there was no independent catering business at all and a turnover based method was a reasonable proxy for use (see paras 61 and 62 of the Court of Appeal judgment where HMRC’s arguments are summarised). Etherton LJ, with whom the other members of the Court agreed, rejected HMRC’s challenge for reasons which are very particular to that case. He noted the FtT’s finding that the catering activity was carried on independently of the taxpayer’s gaming business (para 69), a finding which he thought was “remarkably benign” towards the taxpayer but which was not challenged as perverse (para 73), and held that such a finding of primary fact could not be disturbed by the appeal court (para 77). It followed that the appeal would be dismissed (para 79).

By contrast with LCM, in this case HMRC do not argue that the whole of HCL’s business was aimed at making a profit from gaming, nor that the bars and restaurants were merely ancillary, and it is no part of HCL’s case that the bar and restaurant activities were wholly independent of the gaming instead accepting a degree of dual use. The dispute in this case centres on the extent of that dual use and its impact on the floorspace method proposed by HCL. LCM does not help HCL in the resolution of that issue and the FtT was wrong to draw on LCM as heavily as it did.

In my judgment the UT was correct to find a material error in the FtT’s decision and to set the FtT’s decision aside for that reason. The UT directed itself correctly at paras 60 and 61. It did not draw a false distinction at para 61. The FtT had not addressed either of the aspects of the dual use argument advanced by HMRC satisfactorily. It had not addressed the second aspect at all. HMRC’s challenge was not to the adequacy of the FtT’s reasons but about the absence of a decision – and reasons - on the dual use point. The UT’s decision at para 63 was itself an evaluative one, considering the FtT’s decision as a whole and giving it a fair reading. This Court should in turn be slow to interfere with that conclusion. In my judgment, the UT correctly directed itself on the law and came to a conclusion which was open to it.

If the decision was mine to make afresh, because there was (against my conclusion in the preceding paragraph) some error of law in the UT’s approach, I would anyway come to the same conclusion as the UT did. I agree that the FtT failed to grapple with a central element of HMRC’s case and that the FtT’s decision must be set aside.

I would reject ground 1.