A-G for Scotland v KE Entertainments Ltd
 UKSC 28
On appeal from:  CSIH 78
Lord Reed, President
Lord Hodge, Deputy President
Roderick Cordara QC
(Instructed by Ernst & Young LLP (London))
David Thomson QC
(Instructed by Office of the Solicitor to the Advocate General for Scotland)
Heard on 28 and 29 April 2020
( with whom Lord Reed, Lord Hodge, Lord Lloyd-Jones and Lord Sales agree)
The question on this appeal is whether a bingo promoter is entitled to a refund of Value Added Tax (“VAT”) paid to the Commissioners of Her Majesty's Revenue and Customs (“HMRC”) over many years on fees charged to customers for the right to play bingo. The question itself has only retrospective significance, as VAT on commercial bingo operations was replaced in 2003 by a separate bingo duty. But the appellant's case also raises some broader issues about the assessment of VAT.
The appellant company (which I shall refer to as “the taxpayer”) operates bingo clubs in Scotland. A customer who wishes to play bingo at one of its clubs pays a fee which entitles the customer to take part in a number of games of bingo, forming a session. On payment of the fee, the customer receives a book of cards. Each card contains a grid of numbers for one of the games in the session. The customer does not need to participate in every game. Cash prizes are paid to those who participate in games of bingo and win.
As is well known, games of bingo are presided over by a caller who draws and announces random numbers. If the number called out is on a player's card, the player marks it off. The game continues until one of the players has marked off on their card all the numbers required to win and announces that fact.
The bingo club manager decides, after the sale of tickets for a particular session has concluded and immediately before the session begins, what the prize money for each game in the session will be — save that some games, typically the jackpot game in the session, are played for fixed prizes advertised in advance. Such prizes tend to be consistent for the same sessions from week to week.
VAT is a tax charged on the supply of goods or services. There is a common system of VAT for member states of the European Union established by Council Directive (EC) 2006/112 of 28 November 2006 (“the Principal VAT Directive”). This directive continues to have effect in the United Kingdom during the transition period following the UK's exit from the European Union. The Principal VAT Directive replaced the Sixth Council Directive (Council Directive 77/388/EEC of 17 May 1977). It is sufficient to quote the relevant provisions of the Principal VAT Directive, as it made no changes from the Sixth Council Directive which matter for present purposes.
The main UK national legislation is the Value Added Tax Act 1994 (“the VAT Act”) and the Value Added Tax Regulations 1995 (SI 1995/2518) made under that Act (“the 1995 Regulations”). The national legislation must be interpreted so far as possible in conformity with the underlying directive, which also creates rights that are directly enforceable by individuals against the state in so far as the national legislation has not implemented the directive or has not done so correctly: , paras 46–47.
Article 73 of the Principal VAT Directive provides:
“In respect of the supply of goods or services, … the taxable amount shall include everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party …”
Article 73 is implemented in the UK by section 19 of the VAT Act, which includes the following provisions:
“(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.”
VAT is a tax on turnover, not profit. Thus, in the normal case the tax is charged on the full amount which the customer agrees to pay to the trader without any deduction for costs incurred by the trader in making the supply (although VAT on inward supplies to the trader can be deducted as “input tax” from the trader's “output tax” in calculating the amount of tax payable to HMRC).
In the case of commercial gambling, however, it has been recognised that it would be wrong to regard all the money received from participants by the organiser as consideration for the supply of a service. As pointed out by Jacobs AG in ; , paras 14–30, and , paras 32–59, the basic activity of gambling involves money changing hands through placing bets and receiving winnings and does not involve the consumption or supply of any goods or service at all. What can be seen as a service is promoting and organising the activity and providing facilities for it. In so far as money received from customers by the promoter or organiser is paid out again to players as winnings, it cannot fairly be regarded as consideration for the supply of this service. It is therefore only the net sum retained by the promoter after deduction of winnings which may be included in the taxable amount for VAT purposes.
That approach was endorsed by the court now known as the Court of Justice of the European Union (the “CJEU”) in the case, which concerned the application of the VAT regime to gaming machines. The machines contained two compartments. Coins inserted to play on the machine went into one compartment (the “reserve”), unless the reserve was full, in which case they went into the “cash box”. Coins paid out as winnings all came from the reserve. Coins which entered the cash box were retained by the operator for its own benefit. The machines were set up so that on average they paid out as winnings a pre-determined proportion of the money inserted. The CJEU held that in these circumstances the taxable amount did not include the winnings paid out to players.
To apply this principle to bingo, it is common ground that it is necessary to divide the fees charged by the promoter to customers into two components. One component is referred to as the stake. This is the contribution which each customer is treated as making towards the cash prizes paid out to the winners of games of bingo. The stake is outside the scope of the VAT regime. The other component is the participation fee. This is calculated by deducting the stake from the total fee received and is treated as the consideration obtained by the promoter in return for the supply to the customer of the right to play bingo for cash prizes. At all material times, VAT was payable on this component.
The background to the present dispute is a change in the guidance given by HMRC about how the participation fees on which VAT was payable should be calculated. Until 2007, leaflets and notices published by HMRC stated that bingo promoters should calculate the participation fees separately for each game in a session. This is referred to as the “game by game” basis of calculation. In 2007, the guidance changed. In February 2007, HMRC issued Business Brief 07/07 (“the business brief”), which stated that the participation fees treated as taxable turnover should instead be calculated on a “session by session” basis.
The difference of approach matters for this reason. As mentioned, some bingo games are played for fixed prizes advertised or guaranteed in advance. If too few customers pay to attend a session, the proportion of the fee paid by each customer which is attributed to such a game may not be enough to fund the guaranteed cash prize. In that event the promoter will have to top up the prize money for that game from other funds. If participation fees are calculated on a game by game basis, the funds used to top up the prize money for any game will not reduce the taxable turnover for the session. If, on the other hand, participation fees are calculated on a session by session basis, then amounts used to top up the prize money for any game will reduce the taxable turnover for the session (unless and to the extent that the total prize money paid out in the session exceeds the total fees received).
Accordingly, if the game by game basis of calculation is used, the taxable consideration will potentially be higher than where the session by session basis is used. This is because, on the game by game approach, part of the prize money given out (that part which, for any individual game, is funded by participation fees attributable to other games in the session) is subject to VAT, whereas on the session by session approach this part of the prize money is not subject to VAT.
As mentioned, the change of approach by HMRC was announced in the business brief, published in 2007, which aimed to “clarify” HMRC's policy on how to calculate for VAT purposes participation fees paid by cash bingo players. The key parts of the business brief said this:
“ Calculating the VAT due
When a player pays to participate in all or part of a bingo session, the supply made by the promoter is the right to participate in the number...
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