Casino VAT

The problem of applying the partial exemption method to a private club is explained by A ST J PRICE FCA.

'HERE IS A story about plush partial exemption', I said. 'Imagine that your client runs an upmarket casino. Much of the floorspace is devoted to luxurious facilities such as two dining rooms, a bar, a television lounge and a sitting room. In providing these facilities, substantial expenditure has recently been paid out in expanding and refurbishing the premises. Much of the VAT incurred on normal running costs, and all of that on the expansion and refurbishment, is residual rather than directly attributable to either taxable sales of alcohol and food or to the exempt gambling.

'The casino is run as a members' club. A factor in the situation is that the taxable sales of drink in the bar and of food in the dining rooms are much lower than might be expected. This is because, although bills are raised in each case, only about ten per cent of the total sales value is ever charged to members.'

'You mean, if I joined, I could get a free lunch there?', inquired the Busy Practitioner.

'No way! You would not be allowed in. This is a place for the ultra rich, not the likes of you and me. If the club thinks that a member's gambling is sufficient, he drinks or eats free. The commercial justification for this is that the sales forgone are made up in gaming profits. For instance, in one five-month period, income from gaming was over £10 million whereas that from catering was about £22,000, against costs of £588,000!

'Your partial exemption method is based on the use of the floor area in making taxable supplies as a percentage of the total. This produces a recovery rate of 56.2 per cent. When Customs see your repayment claim for the VAT on all that capital expenditure, they are bound to reconsider whether the agreed partial exemption method makes sense. Does it make sense to you?'

'Well, floorspace seems a reasonable way of doing it. The space occupied by the different activities presumably bears some relationship to the costs incurred on them, whether overheads or refurbishment.'

'No doubt, that was the argument originally put to and accepted by Customs.'

'Well, if Customs had agreed, what was the problem?'

'Unfortunately for the club, a Customs officer, on a visit prior to the main refurbishment expenditure being incurred, realised how favourable the method was and withdrew agreement to it. The argument in Aspinall's Club Ltd (17797) concerned whether that decision was reasonable. The tribunal said that it was.'

'So what method did Customs impose?'

'They did not have to. The withdrawal of a special method means that the standard one based on turnover must be used, unless Customs can be persuaded to accept an alternative special one. Aspinall's had failed to so persuade them.'

'Well what was so unsatisfactory about the floor area basis?'

'The exempt turnover from the gambling was about 99 per cent and the taxable sales from the bar and the catering only one per cent. The shortage of taxable income from the areas not used for gambling implied that they were there primarily to support the gaming rather than the drinking and eating. Customs are bound to query such a situation sooner or later, so anyone advising similar clients ought to warn them that they are benefiting from a favourable situation, which is unlikely to continue indefinitely.

'Aspinall's was represented by experienced VAT advisers, so the argument may well have been no surprise. Normally, the best way of dealing with such a situation would be to accept the distortion against Customs under the present basis. One then tries to negotiate a revised special method to be applied from the date the existing one ceases, which eliminates most of the distortion while, it is to be hoped, still doing better than the standard method. Here, the negotiations failed. One obvious reason for the case going all the way to the tribunal was the amount of money involved.'

'So what chance would I have of negotiating successfully for my smaller clients?'

'That will depend on the facts of each case and, to some extent, on the personalities involved. Nowadays, Customs are on the lookout for cunning plans, and partial exemption is one of the areas at which they are most likely to be looking. In theory anyway, every special method is reviewed by an experienced officer prior to acceptance. I hear stories of how negotiations in the finance and education sectors go on for years. I have no idea to what extent that may be due either to VAT advisers pursuing theory or to obstinate officers.

'Customs officers are busy people, and would prefer to settle rather than have to argue in a tribunal. A practical approach, which accepts that the artificial days have come to an end, may achieve that with some benefit still remaining. In any such negotiation, make sure you ask for implementation of any agreed method from the start of the current partial exemption year.

'Significant capital expenditure can create the need to negotiate in advance. Chard Bowling Club (15114) failed to think forward when it built a new clubhouse. It did not see the need to discuss the partial exemption position with Customs. By the time it realised that the recovery in the first year was low because the initial taxable sales from, for instance, the bar, were small, it was too late to negotiate a special method taking into account the likely normal taxable sales. The capital items scheme did not apply, so no adjustment in subsequent years was possible.'

A St J Price FCA is a VAT consultant in Gloucestershire and author of Value Added Tax in the Tolley's Tax Essentials series, now in its third edition. He may be contacted on 01285 851888, fax: 01285 851889, e-mail: asjprice@aol.com.

Issue: 3891 / Categories: