K E Entertainments – U.K. Supreme Court finds that correcting computations of consideration for supplies did not decrease consideration for VAT purposes

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.” The taxpayer unsuccessfully argued 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:

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.

A similar issue could arise under ETA s. 232, which provides for a potential GST/HST reduction where, after GST/HST has been charged on the consideration for a supply, “for any reason, the consideration … is subsequently reduced.”

Lord Legatt also found 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” (stating that there was no reason “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”). He was pleased to find that there was only one correct method, stating:

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.

Neal Armstrong. Summaries of The Advocate General (representing Revenue and Customs) v K E Entertainments Ltd (Scotland) [2020] UKSC 28 under ETA s. 232(2), s. 123(1), s. 141.01(5) and Statutory Interpretation - Equal Treatment.