The Advocate General (representing Revenue and Customs) v K E Entertainments Ltd (Scotland), [2020] UKSC 28

Customers of the taxpayer, which operated bingo clubs, paid a fee entitling the customer to take part in a number of games of bingo, forming a session, and to receives a book of cards. Each of which could be used for one of the games. Although commercial gambling was not governed by specific VAT provisions, the jurisprudence had recognized (para. 9): “It is … only the net sum retained by the promoter after deduction of winnings which may be included in the taxable amount for VAT purposes.” As funds used to top up the prize money did not reduce the taxable turnover, the taxable turnover was lower if participation fees were calculated on a session by session basis, rather than a game by game basis.

HMRC issued a “business brief” stating that bingo promoters who (like the taxpayer) had been calculating participation fees on a game-by-game rather than session-by-session basis, could make a claim for having overpaid VAT, which the taxpayer did. However, it was precluded by statute from going back more than three years with its refund claims. However, pursuant to article 90 of the Principal VAT Directive, there was no such time limitation where a repayment of VAT was claimed based on there being “a decrease in consideration for a supply.” The taxpayer unsuccessfully argued that where there had been a change from one method of calculating the consideration for its supplies (the game by game basis) to another method (the session by session basis), thereby producing a lower taxable amount, the adoption of the new method involved a “decrease in consideration.” Lord Legatt stated (at para. 48):

What is required … is a change in the consideration actually received by the supplier. … All that has happened is that the taxpayer has had second thoughts about how the consideration received at the time of the supply should be analysed for tax purposes.

Before so concluding, he noted (at para. 30) that it was “clear that there can be only one correct method of calculating the taxable element of fees charged to customers for playing cash bingo and … this was the session by session method and not the game by game method.” Since there was only one correct method, on this basis as well the taxpayer’s claim that its switch in method entailed a decrease in the consideration payable by it foundered.

A UK bingo club operator was subject to VAT, not on its gross sales proceeds for access to its sessions of games, but only on the net sum retained after deduction of winnings. HMRC issued a notice stating that bingo promoters who (like the taxpayer) had been calculating this net sum on a game-by-game rather than session-by-session basis, could make a claim for having overpaid VAT, which the taxpayer did. (A game-by-game calculation produced more tax because a negative net take on a game could not be deducted from the positive net take on other games.) However, it was precluded by statute from going back more than three years with its refund claims – but there was no such time limitation where a repayment of VAT was claimed based on there being “a decrease in consideration for a supply.”

Before rejecting the taxpayer’s argument that its change in calculating the consideration for its supplies involved a “decrease in consideration,” so that it could go back more than three years, Lord Legatt stated (at para. 30) that it was “clear that there can be only one correct method of calculating the taxable element of fees charged to customers for playing cash bingo and … this was the session by session method and not the game by game method.” Since there was only one correct method, on this basis as well the taxpayer’s claim that its switch in method entailed a decrease in the consideration payable by it foundered. In this regard, he stated (at para. 39):

I recognise that the fact that a single composite price is charged is not decisive and there may be cases in which it better reflects commercial reality to regard customers who pay a single price as intending to purchase two or more distinct services … . However, in the present case I can see no reason - and none has been advanced - for going behind the pricing policy adopted by the taxpayer and treating the fee charged to participate in a session of bingo as if it were a bundle of separate fees charged for the rights to play separate games. On the contrary, such a division would fail to reflect the commercial reality that what a customer purchases and intends to purchase is the right to play all or any of the games which make up the session as he or she chooses.

A UK bingo club operator was subject to VAT, not on its gross sales proceeds for access to its sessions of games, but only on the net sum retained after deduction of winnings. HMRC issued a notice stating that bingo promoters who (like the taxpayer) had been calculating this net sum on a game-by-game rather than session-by-session basis, could make a claim for having overpaid VAT, which the taxpayer did. (A game-by-game calculation produced more tax because a negative net take on a game could not be deducted from the positive net take on other games.) However, it was precluded by statute from going back more than three years with its refund claims – but there was no such time limitation where a repayment of VAT was claimed based on there being “a decrease in consideration for a supply.”

Before rejecting the taxpayer’s argument that its change in calculating the consideration for its supplies involved a “decrease in consideration,” so that it could go back more than three years, Lord Legatt stated (at para. 30) that it was “clear that there can be only one correct method of calculating the taxable element of fees charged to customers for playing cash bingo and … this was the session by session method and not the game by game method.” Since there was only one correct method, on this basis as well the taxpayer’s claim that its switch in method entailed a decrease in the consideration payable by it foundered. In this regard, he stated (at para. 39):

Counsel for the taxpayer was concerned to emphasise that deciding how to apportion a unitary price charged by a supplier into two elements for the purpose of calculating VAT can involve an exercise of evaluative judgment, as to which differences of view can exist within a spectrum of what is reasonable. This is undoubtedly true. But it does not follow that there must be more than one method of apportionment which the supplier may lawfully use. Although that is a possible conclusion for a court or tribunal to reach, in most cases where such a question is raised the court or tribunal can be expected to exercise its own judgment as to which method should be used. There is good reason for this. In matters of taxation consistency of approach is of critical importance. If the same exercise of apportionment may lawfully be carried out in more than one way, the result is likely to be that different taxpayers whose situations are identical will lawfully pay different amounts of tax. That offends the principle of equal treatment. It is also capable of distorting competition between businesses.

After finding, contrary to one of the taxpayer’s submissions, that there was only one method for determining the quantum of consideration that it received that represented consideration for its taxable supplies of access to the bingo games hosted by it, Lord Legatt stated (at para. 31-32):

In matters of taxation consistency of approach is of critical importance. If the same exercise of apportionment may lawfully be carried out in more than one way, the result is likely to be that different taxpayers whose situations are identical will lawfully pay different amounts of tax. That offends the principle of equal treatment. It is also capable of distorting competition between businesses.

In the case of a pan-European system of taxation such as VAT, there is an additional consideration that recognising more than one method of apportionment as lawful could result in inequality in competition between businesses situated in different member states.