The Supreme Court dismissed a bingo operator’s appeal seeking repayment of VAT accounted for between 1996 and 2004. The operator had used a game-by-game calculation in line with earlier HMRC guidance, but the only correct method was session-by-session, so the excess was tax that was not due. Recovery was barred by the three-year limit in section 80 of the Value Added Tax Act 1994, and regulation 38 did not apply because there had been no actual decrease in the consideration received.
K E Entertainments Ltd operates bingo clubs in Scotland. A customer pays one fee for the right to take part in a session of games and receives a book of cards. Cash prizes are paid to winners. Some prizes are fixed and advertised in advance; otherwise the manager fixes the prize money after ticket sales and immediately before the session.
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VAT is charged on consideration for a supply. In commercial gambling, money paid out again as winnings is not consideration for the organiser’s service. Only the net sum retained is taxable. The fee is therefore split into a non-taxable stake towards prizes and a taxable participation fee. Until 2007, HMRC guidance required that split to be made game by game. Business Brief 07/07 then said that it should be made session by session: stake money arising in the session is deducted from the total paid to participate in that session. Additional money used to meet a guaranteed prize cannot reduce the VAT value of that session.
The difference is material where attendance is too low to fund a guaranteed prize. On the game-by-game basis, money used to top up one game does not reduce the taxable amount for the session. On the session-by-session basis, it does, unless total prizes exceed total fees. The game-by-game basis can therefore produce a higher taxable amount.
The taxpayer accounted on the game-by-game basis until 2007. It then claimed under section 80 of the Value Added Tax Act 1994. Because section 80(4) imposed a three-year limit, repayment was confined to the preceding three years and was made. After a First-tier Tribunal decision in another operator’s case, the taxpayer entered a credit of £460,630.36 in its return for the period ending December 2012, representing output tax from 1996 to 2004 that would not have arisen on the session-by-session basis. HMRC rejected the adjustment and assessed the same amount. The First-tier Tribunal and Upper Tribunal upheld the taxpayer. The Inner House allowed HMRC’s appeal and reinstated the assessment, while granting permission to appeal because related cases were said to be worth £30m to £40m.
Why only one method was correct
Lord Leggatt, with whom Lord Reed, Lord Hodge, Lord Lloyd-Jones and Lord Sales agreed, treated section 80 as the first obstacle. The time limit was accepted to be valid. If the sum claimed was not VAT due, subsections (4) and (7) prevented credit or repayment. The taxpayer therefore needed to show that game-by-game tax had been due, while also maintaining that the later session-by-session calculations were correct. Its answer was that both methods were lawful.
The Court rejected that answer. Consistency matters in tax: if identical situations may lawfully be apportioned in more than one way, taxpayers may pay different amounts and competition may be distorted. The same concern appears in the VAT directives and in the Court of Justice’s reasoning in MyTravel. On these agreed facts, no evaluative choice arose. The customer bought the right to participate in a session, as shown by the single fee and the book of cards. There was no basis for treating that fee as separate charges for individual games. The calculation was then purely arithmetical: total session fees minus the cash prizes paid in that session. Game-by-game calculation was therefore incorrect, and the excess accounted for between 1996 and 2007 was tax that was not due. Section 80 permitted recovery only within three years.
No later decrease in consideration
Article 90 of the Principal VAT Directive, given effect by regulation 38 of the 1995 Regulations, reduces the taxable amount where, after the supply, there is cancellation, refusal, non-payment or a price reduction. Unlike section 80, regulation 38 has no time limit. The taxpayer said that changing methods, particularly in response to the business brief, was itself a decrease in consideration.
The Court held that article 90 and regulation 38 require a change in the consideration actually received, such as non-payment or a rebate. No authority treated a later change of calculation method as such a decrease. Here every relevant receipt and prize payment was fixed when the session occurred. The later change was, as Lord Drummond Young had put it, a re-attribution within the taxpayer’s accounts rather than a real-world decrease between supplier and customer. Elida Gibbs did not help: the manufacturer there had actually refunded part of the amount, albeit further down the supply chain. The reason regulation 38 cannot be time-limited—the reducing event may occur long after the supply—also had no application where no later event had occurred.
The business brief
The brief did not create the claimed entitlement. HMRC guidance states HMRC’s interpretation; it does not, without specific statutory authority, bind taxpayers or impose directions. Legitimate expectation was irrelevant because the taxpayer was not trying to hold HMRC to the old guidance. In any event, the brief said that promoters who found that they had calculated incorrectly “may” claim repayment of the resulting overdeclaration, subject to Notice 700/45 and its three-year limit. Larger errors required a separate claim, and HMRC might reject repayment that would unjustly enrich the claimant. That language matches section 80, including its unjust-enrichment defence. References to adjustments concerned correction of small errors in the current return, not a regulation 38 adjustment for decreased consideration.
Verdict: The Court unanimously dismissed K E Entertainments’ appeal. Recalculating historic receipts on the correct session-by-session basis did not change what customers had paid. Neither regulation 38 nor the business brief allowed the operator to recover amounts outside the statutory repayment period.
