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DCM Optical Holdings Ltd v HMRC

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In DCM Optical Holdings Ltd v HMRC (No 2) (TC00675 and 00675A – 27 September), a company carried on business as an optician. It applied to use a special ‘partial exemption’ method for attributing its input tax on the basis of floor space. HMRC rejected the application on the grounds that it would lead to an excessive amount of input tax being attributed to taxable supplies.

The Tribunal initially dismissed the company's appeal, but expressed the view that it had a limited supervisory jurisdiction rather than a full appellate jurisdiction. The company appealed to the CS, which remitted the case to the Tribunal, holding that the Tribunal had a full appellate jurisdiction (see [2008] STC 1294). The Tribunal reheard the case and observed that ‘in valuing floor area the feature of zoning proposed as a feature of the PESM, ie, attribution of higher values to certain floor areas in accordance with valuation practice, has been disapproved by other Tribunals’.

However the Tribunal held that there was ‘merit in other aspects of the proposed PESM’, and that the ‘aspect of zoning’ was ‘severable from the proposed scheme and could be removed without damaging it in principle’. The Tribunal observed that with regard to one specific retail outlet, this would produce a recoverable percentage of 21.17% (as opposed to 47.39% under the company’s original proposal, or 8.49% under the standard method).

Why it matters: There have been conflicting decisions on the question of whether ‘floor-based’ partial exemption methods are reasonable. In Vision Express (UK) Ltd v HMRC [2010] STC 742, the Ch D dismissed a company’s appeal against the rejection of such a method. The CA has granted the company leave to appeal against that decision. The Tribunal’s latest decision in DCM Optical Holdings Ltd seems to leave open the possibility of a ‘middle way’, permitting a recoverable percentage which is higher than could be obtained under the standard method but lower than would be obtained under the company’s initial proposals.

Issue: 1047
Categories: Cases