Revenue and Customs Commissioners v K E Entertainments Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 14 August 2017 |
| Neutral Citation | [2017] UKUT 328 (TCC) |
| Date | 14 August 2017 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2017] UKUT 0328 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
The Honourable Lord Ericht (Sitting as a Judge of the Upper Tribunal)
Peter Mantle, instructed by Solicitor to the Commissioners for Her Majesty's Revenue and Customs
Roderick Cordara, QC, Mitchell Moss instructed by Ernst & Young
Value added tax – Taxable amount – Value Added Tax Regulations 1995 (SI 1995/2518), reg. 24 and 38 – Taxpayer charging fee for participation in bingo sessions – Taxpayer recalculating VAT liability in accordance with business brief and Notice published by HMRC – Taxpayer giving effect to recalculation by issuing an internal credit note – Taxpayer making retrospective claim for over-payment of VAT – Whether recalculation resulted in a decrease in consideration for a supply which includes an amount of VAT within the meaning of reg. 38 – Yes – HMRC's appeal refused.
The Upper Tribunal (UT) dismissed HMRC's appeal against the decision of the First-tier Tribunal (FTT) ([2016] TC 05257) and held that the recalculation of the value of bingo participation fees resulted in a decrease in consideration.
KE Entertainments Ltd (KE) appealed against a decision of HMRC that it should not have adjusted its VAT return for period 12/12 in the sum of £460,630. KE had accounted for output tax on bingo participation fees on a game-by-game basis, in accordance with the then HMRC guidance. However, Business Brief 07/07 issued by HMRC in February 2007 and Notice 701/27/2007 indicated that VAT should be accounted for on a session-by-session basis. This allowed KE to reduce the value of the participation fees, on which VAT was payable. KE issued an internal credit note resulting in the disputed repayment claim. On the game-by-game basis, the participation fee for the session is arrived at by adding up the participation fee for each game within the session. On the session basis, on the other hand, the total participation fee is calculated by adding up the ticket prices for all the games within the session, and then deducting all the prizes within the session.
The issue in this appeal had been considered in Carlton Clubs plc [2011] TC 01389, where the FTT found in favour of the taxpayer, holding that it was correct to adjust in the way done by KE. Despite disagreeing with the findings of the FTT, HMRC did not appeal that decision. The FTT decision bound only the parties to that appeal. Nevertheless, KE relied on the Carlton Clubs decision as authority for its adjustment. The principal issue in the appeal was whether a recalculation of the value of bingo participation fees paid by KE's customers on a session basis, rather than on a game basis, resulted in a “decrease in consideration for a supply, which includes an amount of VAT” within Value Added Tax Regulations 1995, reg. 38.
Customers paid a fixed sum to participate in a session of cash prize bingo. For the purposes of VAT, this sum was divided into a stake and a participation fee. The stake was used to fund the prize for the winner and was not consideration for any supply. The participation fee was the only sum received by KE for its own use and was taxable. HMRC contended that there had been no change in policy regarding the manner in which the operator should apportion the session fee between stake money and participation fee. Even if there had been such a change, then, in HMRC's opinion, there had been no decrease in the sum attributable to participation in the bingo session.
HMRC argued that, since there had not been a change in the “consideration for a supply”, reg. 38 did not apply. Therefore, KE's claim should have been made under VATA 1994, s. 80 and be subject to the then three-year time limit. According to HMRC, KE's claim was out of time and its reliance on reg. 38, which does not impose time limits for adjustments, was intended merely to circumvent that time limit.
HMRC contended that Carlton Clubs had been wrongly decided. KE had miscalculated the actual taxable amount of its supplies of bingo in the period 1996 to September 2004. It had consequently declared output tax which was not due and so had overpaid VAT. HMRC conceded that KE had a right to a refund under VATA 1994, s. 80, but submitted that KE had brought its claim eight years after the end of the statutory claim period within the scope of reg. 38 because, at the relevant time, claims under s. 80 became time-barred three years after the end of the accounting period. In any event, according to HMRC, there was no price reduction or decrease in consideration for the credit note issued by KE to evidence.
The FTT held that when Business Brief 07/07 was issued, a line was drawn for calculating the tax due on participation fees. The drawing of that line affected the calculation of the consideration, which in turn affected the calculation of the taxable amount and, consequently, the amount of VAT due. The FTT held that such a change fell within reg. 38 and was not an error. Where the calculations were changed or adjusted by moving from a game basis to a session basis, there must have be a decrease in the consideration attributable to the supply of the right to participate in a bingo session.
In relation to KE's credit note, the FTT was satisfied that the decrease was duly recorded, that the claim was not fictitious and that HMRC were able to verify the adjustment. Accordingly, it met the requirements of reg. 24 and 38 construed in the light of, and having regard to the purpose of Directive 77/388 (the sixth VAT directive), art. 11(C)(1). In accordance with the FTT's findings in Carlton Clubs, the recalculation of the value of participation fees paid by KE's customers on a session basis, rather than a game basis, resulted in a “decrease in consideration for a supply which includes an amount of VAT” which occurred after the end of the prescribed accounting period in which the original supply took place, within reg. 38.
HMRC appealed to the UT on several grounds.
The essence of HMRC's argument on the first ground of appeal was that there had been no reduction in the amount that KE, as bingo promoter, had received from its customers, the bingo players. That amount remained the same, although there was a recalculation of its constituent elements.
The error in this argument was that it proceeded on the basis that the consideration is the amount paid by the customer by way of session fee. In fact the consideration is the amount that the bingo operator keeps. Thus, while there was no reduction in the amount that KE received from its customers (i.e. the session fee), that was irrelevant, as there was a reduction in the consideration (i.e. the element of the session fee which KE was entitled to keep). Thus, the first ground of appeal failed (para. 55 of the decision).
The second ground of appeal was that the guidance in the Business Brief was irrelevant as to whether there had been a decrease in consideration. The UT held that, far from being irrelevant, the Business Brief was fundamental to that question. It is clear from the Business Brief that HMRC wished taxpayers to stop using the game basis and to start using the session basis. The Brief was emphatic: in the section headed “Calculating the VAT due” the taxpayer is instructed as to what he “should” or “should not” do. Also, HMRC wanted this change to have retrospective effect, otherwise it would not have invited the taxpayer to make retrospective claims under VATA 1994, s. 80. The fact that the retrospectivity under s. 80 was limited because of the time limit in s. 80 does not detract from this. The relevance of the Business Brief is that the taxpayer is being instructed to calculate the VAT in a way which reduced the amount which the taxpayer could take for itself, which constituted a decrease in consideration. Accordingly, this ground failed (para. 60 of the decision).
This ground stated that the FTT erred in failing to recognise that the single/multiple supply analysis was relevant to consideration, and that whether there was a single supply had to be ascertained at the date of supply and was unaffected by any subsequent event.
The UT rejected this ground. It focussed on the nature of supply. However, it is clear from European case law that the focus is to be on consideration. However, consideration can be affected by subsequent events, which is what happened here (para. 62 of the decision).
The UT held that the FTT had correctly concluded that KE did not make an error or mistake when it made its calculations on the game basis at the stage when that was required by HMRC. The game basis was not unlawful. Neither was the session basis. There was merely a retrospective change as to which lawful basis was to be used. That retrospective change was given effect by a change in the deeming under VATA 1994, s. 14. The HMRC argument that the deeming cannot be revisited at a later date was not justified by the plain wording of s. 14, nor was it compatible with the principles of European law which permit post-supply alteration of the consideration (para. 64 of the decision).
HMRC argued that the FTT had erred in relying on the Brief inviting retrospective claims, as such claims were invited in terms of s. 80 and not in terms of reg. 38. The fact that HMRC invited claims under s. 80 does not bar any other lawful claims. If, as in this case, KE has a claim under reg. 38, then it is entitled to exercise it (para. 66 of the decision).
Having rejected HMRC's position as a matter of law and principle, the FTT nonetheless went on to test HMRC's position further by testing how it would operate in terms of accounting practice and noted that HMRC were unable to explain that. The UT held that the...
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