A-G for Scotland v KE Entertainments Ltd
| Jurisdiction | Scotland |
| Judgment Date | 13 December 2018 |
| Neutral Citation | [2018] CSIH 78 |
| Date | 13 December 2018 |
| Court | Court of Session (Inner House) |
[2018] CSIH 78
Lord President, Lord Drummond Young, Lord Tyre
DM Thomson QC, Roxburgh; Office of the Advocate General appeared for appellants
Ghosh QC; DLA Piper Scotland LLP appeared for respondents
Value added tax – Calculation of VAT due on payments to play bingo – Change in methodology published in Business Brief – Whether claims for overpaid VAT could be made under the VAT Regs 1995, reg. 38 or VATA 1994, s. 80 – If claims made under s. 80 the four-year cap applies.
The Court of Session considered an appeal by HMRC against a ruling of the Upper Tribunal that claims for overpaid output tax made following a change in HMRC policy (announced in a Business Brief) were made under reg. 38 of the 1995 VAT Regulations, not s. 80 VATA 1994. Unlike s. 80 claims, reg. 38 claims are not subject to the four-year cap.
KE Entertainment runs bingo halls. Players pay a fee for a session of bingo during which several games are played. The fee is divided into two elements, a participation fee (subject to VAT) and stake money (outside the scope of VAT). The stake money is returned to the players in the form of prize money.
The amount of prize money paid out for each game will vary, games may have fixed prizes or the prize may be a proportion of the fee paid by the players. Until 2007 HMRC policy was that the fee paid by players should be apportioned between the participation fee and stake money on a game by game basis. In 2007, Business Brief 07/07 announced that HMRC policy had changed and the fee should be apportioned on a session by session basis. Calculating participation fees on a session by session basis resulted in the fees being reduced and, therefore, the suppliers having decreased output VAT. The Brief invited suppliers to make claims for repayment of previously overpaid VAT under s. 80 of VATA 1994, such claims being subject to the four-year cap.
KE Entertainment argued that the Brief resulted in a change in consideration due to it and that therefore, it could make a claim for a refund of overpaid output tax under reg. 38 SI 1995/2581. As reg. 38 claims are not subject to the cap, it could claim for VAT overpaid since it started trading in 1996.
KE Entertainment relied heavily upon the FTT decision in Carlton Clubs plc [2011] TC 01389 in which a similar case was decided in the appellant's favour – i.e HMRC lost and corrections made following Business Brief 07/07 were done under reg. 38.
In a unanimous decision, the Court of Session held that Carlton Clubs plc had been wrongly decided. HMRC's publications, including Brief 07/07 constituted the publication of HMRC policy with which taxpayers were able to agree or disagree, such publications did not amount to firm instructions to taxpayers. Considering the impact of HMRC policy on the fees paid to play bingo, the change related to the calculation of the output tax. The policy change did not alter the contribution or price paid by the customer. Any taxpayer wishing to take advantage of this change in policy retrospectively did so under s. 80 VATA 1994 and such corrections were subject to the capping provisions contained therein.
KE Entertainment Ltd is a lead case with 14 appeals held behind it and the tax involved in these appeals is over £40m. The decision will have a significant impact on those directly affected and we wait to see whether an appeal is made to the Supreme Court or a referral to the ECJ sought. More widely, the decision provides guidance on the use of HMRC publications and the impact of changes to HMRC policy.
[1] This appeal concerns whether a taxpayer is entitled to a refund of Value Added Tax, which was paid over many years, following a change in HMRC's approach to the assessment of VAT on the game of bingo. This, to a large extent, turns on whether the change resulted in a “decrease in consideration” under regulation 38 of the Value Added Tax Regulations 1995. Regulation 38 implements article 90 of the Principal VAT Directive, which refers instead to a reduction in “price”. Article 90 superseded article 11(C) of the Sixth Council Directive.
[2] Article 11(A) of the Sixth Council Directive (77/388/EEC of 17 May 1977 on the … Common system of value added tax: uniform basis of assessment) provided, in relation to VAT, that:
1. The taxable amount shall be:
- in respect of supplies of goods and services … everything which constitutes the consideration which has been … obtained by the supplier from the … customer … for such supplies …
Article 11(C) provided:
1. … [w]here the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly …
[3] The Sixth Directive was recast in the Principal VAT Directive (2006/112/EC of 28 November 2006 on the Common system of value added tax). Article 73 of the latter, which replaced article 11(A) of the former, provides that:
In respect of the supply of goods or services … the taxable amount shall include everything which constitutes consideration obtained … by the supplier, in return for the supply, from the customer …
Article 90, which is in identical terms to article 11(C), states that:
… [w]here the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly …
[4] Article 90 is translated into the United Kingdom regime by regulation 38 of the Value Added Tax Regulations 1995 as follows:
Adjustments in the course of business
(1) This regulation applies where –
- …
- (b) there is a decrease in consideration for a supply
which includes an amount of VAT and the increase or decrease occurs after the end of the prescribed accounting period in which the original supply took place.
Regulation 24 states that an increase in contribution is:
an increase in the consideration … which is evidenced by a credit or debit note or any other document having the same effect
“[D]ecrease in contribution” is to be interpreted in the same way. Regulation 38 continues by stating that, where it applies:
(3) … the maker of the supply shall …
- (b) in the case of a decrease in consideration, make a negative entry;
for the relevant amount of VAT … in … his VAT account
[5] Section 19 of the Value Added Tax Act 1994, which is derived from article 73,
(2) If the supply is for a consideration in money its value shall be taken to be such amount as, with the addition of the VAT chargeable, is equal to the consideration.
…
(4) Where a supply of any goods or services is not the only matter to which a consideration in money relates, the supply shall be deemed to be for such part of the consideration as is properly attributable to it.
[6] Section 80, which deals with, inter alia, overpayments of VAT, provides that HMRC are liable to credit a person who “has brought into account as output tax an amount that was not output tax due”. However, the person must make a claim and HMRC are not liable unless the claim is made within four years of the end of the relevant accounting period.
[7] Bingo is a gambling game of remarkable simplicity and enduring popularity, at least in its on-line form. It continues to be played in a decreasing number of bingo halls. In the bingo hall version, the players pay a fixed fee to participate not in a single game but in a session of several games lasting for about two hours in total. Although there are several variants, each game generally involves the players having pre-printed or electronic cards containing columns of numbers. A caller will draw and announce random numbers and the players will, over time, mark off these numbers, if they appear on his or her card. The end of a game occurs when one of the players has marked off all of his or her numbers. That player will receive a cash prize.
[8] For all its simplicity, bingo has a Value Added Tax regime of some complexity. The fee, which is paid by a player for a session, requires to be divided into two components for each game. The first is called the participation fee, which is that part attributed to the supply of the game to the player. It is subject to VAT. The second is the stake money; being the part said to contribute to the cash prize paid out to the winner. This is not subject to VAT. A problem arises because the value of each component can vary from session to session according to the number of players. It varies also because the promoter may only decide on the prize money at the start of a session, once he or she has reviewed the ticket sales; albeit that the amount is likely to be similar to that selected for the same session during the previous week. The prize money may not be directly related to the number of participants. There may be a guaranteed minimum for particular, or all, games. The promoter may therefore require to top up the prize money, where there is a dearth of custom, in respect of one game from the general pool of participation fees in the session.
[9] The amount of VAT payable will vary, depending upon whether it is assessed on a game by game or session basis. If it is the former, the calculation is relatively straightforward, since the level of the participation fee for each game will have been decided at the start of the session. The VAT will be the sum of that element multiplied by the number of players. This is so even if the participation component might theoretically have been reduced, if the prize money required to be topped up. If it is the latter, the total prize money paid out during a session is deducted from the gross receipts for that session in order to calculate the participation fees upon which VAT is levied. The contribution to the VAT exempt prize or stake money is higher and hence the VAT payable is lower. It is the mode of assessment, and by whom and how it is determined, which lies at the heart of the appeal.
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