[2011] UKFTT 721 (TC)
TC01558
Appeal number: LON/2008/2414
VAT –
exemption for providing facilities for the placing of bets – item 1 Group 4
Schedule 9 VATA 1994 – whether extending to betting syndicate’s agent which
negotiated odds – No – whether breach of fiscal neutrality - No
FIRST-TIER TRIBUNAL
TAX
RATING
REPORT LIMITED Appellant
-
and -
THE
COMMISSIONERS FOR HER MAJESTY’S
REVENUE
AND CUSTOMS Respondents
TRIBUNAL: MICHAEL S CONNELL (TRIBUNAL JUDGE) HELEN
MYERSCOUGH (MEMBER)
Sitting in public at 45 Bedford Square, London WC1 on 27 and 28 June 2011
Mr Paul Lamford a Director of
RRL Company for RRL
Mr Mark Sheldon of Counsel for
the Respondents
© CROWN COPYRIGHT
2011
DECISION
Introduction
1. The
Appellant, Rating Report Limited (RRL), appeals against an assessment of Value
Added Tax (VAT) in the sum of £38,582 raised in respect of the VAT period 05/05
to 11/07.
2. The
assessment, raised on 28 April 2008 followed a Decision by HMRC that the
supplies made by RRL during the material period did not qualify for exemption
from VAT under Item 1, Group 4, Schedule 9 of the VAT Act 1994. In particular,
it was decided that RRL’s activities could not properly be described as “the
provision of facilities for the placing of bets...” for the purposes of the
exemption.
Applicable law
3. Section
5 of the VAT Act 1994 defines the making of a ‘supply’ for the purposes of the
Act. Section 5(2)(b) states: “anything which is not a supply of goods but
is done for a consideration .. is a supply of services.”
4. Section
31 of the VAT Act 1994 provides that a supply of services will be an exempt
supply if it is of a description specified in Schedule 9 of the Act.
5. Item
1 of Group 4 of Schedule 9 of the Act defines the following activity as an
exempt supply of services : “The provision of any facilities for the placing
of bets or for the playing of any games of chance for a prize.”
6. Item
1 of Group 4 of Schedule 9 (‘Item 1’) transposes into domestic law Article
13B(f) of the Sixth Directive (now Article 135(1)(i) of European Directive
2006/112) which provides that the following activities should be exempt from
VAT : “Betting, lotteries and other forms of gambling subject to conditions
and limitations laid down by each member state.”
The factual background
7. RRL
commenced operations on 2 December 2002 as a software development company
having been formed to develop a data-base and betting models for a variety of
popular sports including football, golf and tennis. The purpose of its work was
firstly to enable the company to place bets on behalf of individuals and
secondly to offer its services to the betting industry once it had been able to
create an extensive data-base and reliable betting models.
8. RRL
placed bets on sporting events on behalf of members of its sports investment
fund (SIF). Individuals who contributed to the SIF were collectively known as
the syndicate and consisted of shareholders and their nominees. The company had
a separate bank account in which shareholder funds were invested for the sole
purpose of betting on events. Shareholders were invited to invest by purchasing
‘units’ in the betting fund to a pre-determined maximum. Money in the fund was
aggregated and bets placed on sporting events at the discretion of the company.
The administration of the fund by RRL consisted of the placing of those bets
and the collection of winnings on behalf of the syndicate. Membership of the
betting syndicate was a distinct and separate role to that of being a
shareholder as not all contributors to the syndicate were shareholders, nor
were all shareholders necessarily involved in the syndicate. The two sets of
people were therefore not synonymous and HMRC therefore say that the supply of
the company’s services to the syndicate (although not an argument advanced by
RRL) was not a non-business relationship for VAT purposes.
9. RRL’s
income was derived from two sources during the period in question. First it
would retain a percentage of the winnings derived from successful bets made on
behalf of the syndicate. The percentage retained by the company varied during
the period in question. The balance held in the SIF (assuming the betting
activities were successful and overall winnings exceeded the value of bets
placed) was distributed back to shareholders proportionate to the number of
units purchased in the betting fund.. The percentage of winnings retained by
RRL appeared to reflect the degree of success or otherwise of its betting
activities. The second source of RRL’s income was an annual fee equivalent to 2%
of the SIF.
10. Invoices were
issued by RRL to the syndicate in respect of the services it provided. The
invoices were described as being in respect of ‘fees’ charged by the company to
the syndicate and in its annual accounts this income was described as ‘sales’.
11. Following
consideration of the nature of RRL’s business, HMRC concluded that at no stage
during the material period did the arrangement between RRL and the syndicate
involve any liability for the payment of winning bets on the part of RRL In the
event of the insolvency of RRL, syndicate funds would be returnable to its
members. HMRC say that it is apparent that the administration and calculation
of VAT on supplies made by RRL to the syndicate would have been entirely
straightforward, involving no more than the application of VAT to each invoice
for fees. The supply of the company’s services to the betting syndicate were
therefore regarded by HMRC as one of an administrative nature and not of
betting itself, and therefore was taxable at the standard rate rather than
being an exempt activity. HMRC accordingly raised an assessment on the basis
that RRL were providing standard rate administrative services to the
syndicate. The assessment was calculated on the basis of spreadsheet
information provided by RRL showing its income from ‘syndicate fees’ during the
assessment period.
12. RRL disputes the
decision by HMRC to raise an assessment, primarily on three grounds. Firstly it
is contended that not only did it provide betting facilities, it also took an
active part in the betting process. It is argued that RRL’s activities involve
‘…the provision of facilities for the placing of bets..’ pursuant
to Item 1 and plainly fall within the wording of the exemption. RRL argues
that, contrary to HMRC’s submissions, there was no direct transactional link
between the consideration paid to the company and the provision of services
which it offered and that its activities were therefore not merely
administrative in nature. Secondly it is contended that the bearing of risk is
not a requirement of the exemption nor a criteria on which to base a decision
as to the nature of the supply. Thirdly it is argued that RRL’s activities are
in essence the same or similar to those provided by a bookmaker or a betting
exchange, the services of which are regarded by HMRC as VAT exempt. It
contended that HMRC has acted contrary to its own internal guidelines and that
HMRC has therefore been inconsistent in it VAT treatment of similar trading
entities with the result that there has been a breach of the principle of
fiscal neutrality.
Nature and scope of the VAT exemption under Schedule
9 Group 4 Item 1
13. HMRC say that
the exemption in Item 1 must be interpreted strictly and referred the Tribunal
to the case of United Utilities v HMRC [ECJ.89105 [2006] STC 1423]
where the ECJ considered the nature and scope of the exemption. In that case
Vertex Data Services Limited (part of the United Utilities Group) provided a
call centre to take bets from customers of Littlewoods. Vertex merely received
telephone calls and recorded the bets in accordance with conditions stipulated
by Littlewoods. Vertex’s charges were based on the number of call minutes and
calls received. United Utilities argued that article 13B(f) of the Sixth
Directive is intended to exempt the activity of providing the framework within
which gambling can take place. The Court disagreed with this argument and said
that the provision of a call centre to a telephone bookmaking organiser did not
constitute the provision of facilities for betting transactions within the
meaning of article 13B(f) and therefore could not qualify for the exemption
from VAT.
14. HMRC say that
the exemption in Item 1 is in place, not as with many exemptions to
confer a desirable social benefit, but to reflect the fact that the
administration of VAT can be difficult as a matter of practice in the context
of the provision of gambling services. It is submitted that United Utilities
made it clear that the critical question is whether the provider of
services assumes the risk of paying winnings in consideration of taking bets.
In the absence of risk on the part of the provider the service cannot be
properly characterised as ‘the provision of facilities for the placing of bets’
for the purposes of the exemption. HMRC says that even on RRL’s own case there
is no question that it ever assumed the risk of paying out winnings on
successful bets, and therefore it follows that its activities must fall outside
the scope of the exemption.
15. It is submitted
by HMRC that United Utilities established three propositions of a
general principle which are material to this appeal :
(i) the scope of the exemption conferred in respect of
betting/gambling should be strictly interpreted : “The terms used to specify
the exemptions provided for by Article 13 of the Sixth Directive are to be
interpreted strictly, since they constitute exemptions to the general principle
that VAT is to be levied on all services provided for consideration by a
taxable person ..” (paragraph 21)
(ii) the scope of the exemption should be determined by
reference to the purpose for which the exemption has been conferred : “The interpretation of the terms used in that provision must be consistent with the
objectives pursued by those exemptions .. it should be noted that the exemption
from which betting, lotteries and other forms of gambling benefit is based on
practical considerations, gambling transactions not lending themselves easily
to the application of VAT.” (paragraphs 21-22)
(iii) the key determining factor in assessing whether a
transaction falls within the scope of an exemption is whether the supplier of
the service assumes the risk of paying out on a winning bet. The betting
activity described in Article 13B(f) of the Sixth Directive is “characterised
by the offer to customers placing bets of a chance of winning in consideration
for accepting the risk of having to pay for winnings.”
16. It is contended
by HMRC that the application of United Utilities principles to the facts
of the case shows that the supply of services made by RRL to the syndicate
during the period in question did not fall within the nature or scope of the
exemption.
17. HMRC further
argue that RRL is seeking to take advantage of the fact that its services
happened to have been offered in the context of gambling in order to benefit
from an exemption to the general rule that taxable persons who provide services
should account for VAT. HMRC reason that if RRL was seeking to provide, for
example, an investment management service which offered similar prospects of
gain or loss (but not at the direct expense of RRL) there would be no question
of exemption.
18. It is contended
by HMRC that adopting the first general proposition established by the ECJ in United
Utilities the scope of exemption should be interpreted strictly, and that
on any reasonable interpretation the service provided by RRL did not amount to ‘the
provision of facilities for the placing of bets’. It is argued that,
insofar as there may be doubt or ambiguity as to the extent to which the
exemption applies, that doubt or ambiguity should be resolved in favour of RRL
having to account for VAT in the same manner as any other taxable person.
19. HMRC further
submit that the second proposition in United Utilities recognised that
the application of VAT to certain types of betting transactions might raise
practical difficulties, particularly to those contexts where the supplier of
the service is at risk of payout out on winning bets. In this case it is
argued that there would be no difficulty whatsoever in applying VAT to the fee
invoices submitted by RRL to the syndicate and the fact that the amount of each
invoice might fluctuate depending upon the winnings achieved from successful
bets in the period in question did nothing to alter the position. It would have
been entirely straightforward for RRL to calculate the sum due in the period
concerned and apply VAT to that figure.
20. Finally HMRC
argue that, irrespective of any potential uncertainty as to whether RRL’s
activities fall within the exemption by reference to the first two propositions
established by United Utilities, adopting the third proposition and
taking RRL’s own account of the nature of its business at face value, the
company had not offered betting services of a type contemplated by article
13B(f) of the Sixth Directive, as transposed into domestic law by Item 1. RRL
did not offer customers the chance of winning in consideration for the risk of
it paying out on winning bets. RRL assumed no risk in respect of the payment
of winning bets whatsoever.
RRL’s response
21. It is argued on
behalf of RRL that the company provided facilities which allowed the syndicate
to place bets and that its activities fell squarely within the wording of the
exemption. It refutes the argument that it was merely providing administrative
services. It is submitted that RRL was paid a share of profits if, and only
if, such profits were earned from the betting activities which depended upon
profitability which varied between 10% at the start of operations and 30% at
the end of the period of the VAT assessment. No payment was made by the
syndicate to RRL for bets which lost, which it is argued show that payments
were not related to the provision of administrative services. The 2% charge on
the SIF value was purely to cover running costs and not dependent upon the
success of bets placed.
22. RRL contends
that, in the United Utilities case, the value and success or otherwise
of each bet had no bearing whatsoever on Vertex’s charges whereas in contrast
the fees charged by RRL, were critically dependent on these factors. It is
therefore submitted that RRL’s services were entirely different from those
provided by Vertex and that consequently the decision by the ECJ in United
Utilities is not relevant to this case.
23. In addressing
HMRC’s submissions and the propositions laid down in United Utilities RRL
argues that its activities, and the service provided to the syndicate has
similarities with the services provided by UK betting exchanges, who charge
fees based on a percentage of customer winnings and which are regarded by HMRC
as exempt from VAT.
24. RRL referred the
Tribunal to HMRC’s VAT guidance V1-7, chapter 19, section 2.1 which states :
‘… The source of revenue for most exchanges is
a commission charged on customer winnings. The charge usually varies between 2%
and 5% with lower fees for larger and more frequent customers. For VAT purposes
we regard this commission as consideration for an exempt supply of the
provisions of facilities for the placing of bets under VAT A 1994 schedule 9, group
4, item 1 …’
25. RRL also refers
to internal guidance of HMC&E Policy Group [October 2004] (obtained by RRL
under the Freedom of Information Act 2000) which contains the following
statements of practice :
‘(i) traditionally
we have regarded betting exchanges as exempt on the grounds that they were
clearly providing facilities for the placing of bets
(ii) if
an agent actually takes some risks on behalf of the principal (i.e. negotiate
orders or shares the financial risk of the bet, then the exemption would still
apply
(iii ) accepting
money is currently our key criterion for exempting betting agents
(iv) although
our guidance does not explicitly say so only.. the services of agents to
accept money on behalf of bookmakers qualify for exemption. This would apply
even if the agents have no discretion of their own as to whether to accept
bets’
26. RRL says that
each of the statements has relevance to the services it provides, arguing that
it:
(i) provided facilities for the
placing of bets
(ii) negotiated
odds through bookmakers and betting exchanges, sharing the financial risk of
each bet in that it received no payment for a particular bet if that date was
unsuccessful
(iii)
accepted money for the placement of bets
(iv)
had complete discretion as to which bets were placed
RRL argues that the principle of fiscal neutrality
dictates that it should receive the same tax treatment as betting exchanges and
other business which undertake similar transactions. Where it places bets with,
say, Betfair, in every case there is a ‘back’ or a ‘lay’ bet where RRL requests
specified odds before deciding on whether to place the betting stake. It says
that with all bets RRL is accepting a bet from another customer of Betfair. The
lay bets are on offer to accept a bet at specified odds and RRL therefore has
input into the odds. It submits that consequently its activities must be seen
as the undertaking of VAT exempt betting transactions for which it has provided
facilities and received consideration from its customers.
27. RRL argues s
that it is providing a similar facility to that provided by Betfair and similar
organisations and that if HMRC’s analysis of RRL’s activities is correct then
Betfair’s activities should also not benefit from the exemption as they are
merely matching up bets as between two of their customers for which they
receive a commission. Advancing this argument further, RRL says that diary
notes of statements made by an officer of HMRC during discussions prior to the
raising of the assessment indicated that the officer dealing with the matter
disagreed with HMRC policy and that Betfair’s services should in fact be
taxable. This appears to be confirmed in internal guidance [January 2005]
(again, information obtained under the Freedom of Information Act 2000) which
proffers the view that :
‘.. betting exchanges services should be taxable. But in view of our
past treatment of these and the Treasury’s view … HMRC should continue the same
policy
Background to the reasons for the VAT tax treatment of
the gambling industry
28. The rationale
behind the introduction of the EU exemption for betting and gaming was
discussed by Advocate General Jacobs in HJ Glawe Spiel v Finanzamt Hamburg –
Barmbeck – Uhlenhorst [1994] STC 543 who said :
‘the underlying problem is that gaming transactions are ill suited to
value added taxation. This was recognised by the Commission in its proposal for
the Sixth Directive which provided for the qualified exemption of gaming and
lotteries …the exemption of gaming
and lotteries is based on purely practical considerations. ..’
Advocate General Jacobs further discussed the problems
inherent in betting gambling activities :
20.‘Whilst gambling for money entails expenditure by a
gambler, it does not in its simplest form give rise to consumption of goods or
services. Suppose for example that A enters into a private bet with B, both
placing their respective bets on the table. A wins the bet and collects the
money on the table. In such a case it would be absurd to suggest that A and B
provide services to each other for consideration equal to the amount of their
respective bets. The placing of the bets and the collection of the winnings is
simply part of the gambling transaction. The placing of bets, although it
involves the outlay of money does not constitute the consumption of goods and
services which is the taxable event under the VAT system.
21. Commercial gambling is different insofar as
the person organising the gambling arranges matters in such a way that on
average his winnings are sufficient to meet his costs in organising the
gambling and to provide him with a reasonable profit. To that extent the person
organising the gambling may perhaps be regarded as not only taking part in the
gambling himself but also providing a service to the other gamblers consisting
in organising the gambling. The service provided by the organiser consists in
providing the framework within which such activity can take place, his reward
for that service being the surplus of winnings that he arranges for himself
together with any specific omission which he may charge.
22.There may be some theoretical difficulty
viewing for example a bookmaker’s net winnings as the consideration of the
services. Whilst it seems possible to regard him as providing a service the
‘price’ which he receives for that service varies and depends partly on chance
and partly on his skill in settling the odds … That difficulty explains why
betting and gaming are ill suited to taxation on a value added basis and lend
themselves better to specific taxes..’
Conclusion
29. RRL does not
claim to be a bookmaker but nonetheless says that it is providing facilities
for the placing of bets. It was however the agent of the syndicate, not an
agent of the bookmaker or betting exchange which took the risk of the bets.
This distinguishes RRL’s activities from those of a bookmaker, betting agent
or similar organisation which actively offers betting facilities in the
ordinary accepted meaning of the expression.
30. RRL assumed no
risk. The company had no direct risk in respect of the individual bets which
were placed from a separate syndicated fund. That liability remained with the
bookmaker with whom RRL placed the betting question on the part of the
syndicate. Although RRL's margins were based on the profitability and
performance of its betting fund this did not amount to direct exposure to the
risk of the bet itself. Indeed RRL's business model was designed to ensure that
its costs were covered regardless of how well or poorly the SIF performed.
There was no gain by RRL at the expense of the syndicate for bets which lost,
nor any loss by RRL to the advantage of the syndicate for bets which were won.
RRL simply administered the betting fund, placing bets and collecting any
winnings on behalf of the syndicate.
31. RRL argues that
it is not necessary to assume risk in order to fall within the exemption.
However the case of United Utilities clearly shows that argument to be
incorrect. It is clear from Advocate General Jacobs’ rationalisation referred
to in paragraph 29 above that the reason gambling is exempt from VAT is that it
is often impossible to identify what is the consideration for the supply by the
person providing the framework for the gambling. Bookmakers, betting exchanges,
and to varying degrees betting agents, clearly fall within that framework. The
provision of betting facilities has to be characterised by the assumption of
risk. A service of a administrative or mechanical nature such as that provided
by RRL, not involving the risk of loss clearly does not amount to the provision
of betting facilities.
32. RRL’s argument
that there is no need to assume risk, would appear to be a tacit
acknowledgement that its activities were not in fact similar to those of a
conventional bookmaker. RRL says that its activities are similar to those of
organisations such as Betfair, which services include the matching up of bets
between customers out of which they make a profit and that, on the principle of
fiscal neutrality. there is no reason why the VAT treatment of its activities
should be any different. However, Betfair and similar organisations do not
refer customer’s bets to a third-party but actually provide the betting
facilities. Although RRL decide what to bet on, Betfair and similar
organisations allow individuals to offer to lay odds with them, not a third
party. They provide the entire framework for customers to place bets. To that
extent, therefore, the ‘similarity test’ referred to in The
Commissioners for HMRC v Rank Group, [2009] EWCH (Ch) 1244. is not
satisfied. RRL’s supplies and the consideration for the supplies were entirely
different to those of a bookmaker or a betting exchange, both of which to
varying degrees accept money, negotiate odds and assume an element of risk.
33. As HMRC submit,
in attempting to distinguish the United Utilities’ analysis, RRL has
focused on differences in the factual background to the two cases and ignored
the general principles set out by the ECJ. United Utilities did not turn
on the fact that RRL in that case provided only telephone services or levied
charges pursuant to a formula, whether based on the number of minutes spent on
calls or otherwise; it turned on the ECJ's general propositions of law referred
to in paragraph 15 above.
34. The information
obtained by RRL pursuant to freedom of information requests referred to in
paragraphs 25 and 27 above, which may indicate HMRC's internal guidance on the
interpretation of VAT legislation, is not relevant to the issue. The law
relating to exemption from VAT is made by legislation interpreted as far as
necessary by the Courts. In any event there is nothing in the material
disclosed which may indicate that HMRC's interpretation of the law as it
applies to the services provided by RRL is inconsistent with its decision not
to treat those services as VAT exempt. Further, providing the similarity test
is not satisfied, it is not the function of the Tribunal to assess whether or
not HMRC have been consistent in their treatment of this issue in respect of
other traders. The Tribunal does not have jurisdiction under s 83 VATA to consider
or decide whether HMRC’s treatment of another trader for VAT purposes is unfair
or otherwise - National Westminster Bank v HMRC [2003] STC 1072. On the
evidence the ‘similarity’ test has not been satisfied. A case of unfair
treatment has not been made out. It has not been shown that there has been
differing treatment of similar supplies in competition with one another.
35. For the above
reasons the Tribunal concludes that RRL’s activities during the material period
cannot properly be described as ‘the provision of any facilities for the
placing of bets’ for the purposes of the exemption in Item 1 of Group 4
Schedule 9 VATA 1994
36. The appeal is
accordingly dismissed.
37. This document
contains full findings of fact and reasons for the decision. Any party dissatisfied
with this decision has a right to apply for permission to appeal against it
pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax
Chamber) Rules 2009. The application must be received by this Tribunal not
later than 56 days after this decision is sent to that party. The parties are
referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax
Chamber)” which accompanies and forms part of this decision notice.
MICHAEL S CONNELL
TRIBUNAL JUDGE
RELEASE DATE: 9 November 2011
