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The taxpayer company ran casinos. Until 2007, it used a modified turnover partial exemption special method (PESM) to claim residual input tax on its business, because most of its turnover was derived from gaming.
In 2007, the company proposed a new method, focusing on a floor-based measure of use and overheads, to take account of customers who came to the casinos for entertainment, food and drink, but not to gamble.
The First-tier Tribunal decided the new PESM fairly and reasonably represented the taxpayer's use of residual VAT bearing inputs more so than the existing one.
The Upper Tribunal (Tax and Chancery Chamber) agreed, so HMRC appealed to the Court of Appeal.
The Court of Appeal said neither the First-tier Tribunal or the Upper Tribunal had erred in law.
The First-tier Tribunal had made a finding of fact that the taxpayer's catering activities, although not profitable at the relevant time, were businesses in their own right and were not ancillary to the gaming business.
The catering business was a potential source of profit, independent of the taxpayer's gaming activity, meaning it was impossible to say the decision had been wrong in law.
HMRC’s appeal was dismissed.
