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

A bingo operator sought to reclaim VAT overpaid between 1996-2004 after HMRC changed its guidance from game-by-game to session-by-session calculation. The Supreme Court held the claim was time-barred under section 80 VAT Act, rejecting the argument that a change in calculation method constituted a decrease in consideration.

Facts

The appellant (“the taxpayer”) operates bingo clubs in Scotland. Customers pay a fee entitling them to participate in a session of bingo comprising multiple games, with cash prizes awarded to winners. For VAT purposes, the total fee received must be divided into two components: the “stake” (the contribution towards cash prizes, outside the scope of VAT) and the “participation fee” (the consideration for the supply of the right to play, on which VAT is payable).

Until 2007, HMRC’s published guidance directed bingo promoters to calculate participation fees on a “game by game” basis. In February 2007, HMRC issued Business Brief 07/07 stating that participation fees should instead be calculated on a “session by session” basis. The session by session method typically produced a lower taxable amount because money used to top up guaranteed prizes from other sources could reduce taxable turnover across the session.

The taxpayer successfully claimed a refund under section 80 VAT Act 1994 for the three years permitted by the statutory time limit (2005-2007). In 2012, following the First-tier Tribunal decision in Carlton Clubs plc, the taxpayer made an adjustment of £460,630.36 in its VAT return to reclaim output tax from 1996-2004, contending this was an adjustment under regulation 38 of the 1995 Regulations (which has no time limit) rather than a claim under section 80.

Issues

The Supreme Court had to determine:

• Whether both the game by game and session by session methods were lawful methods of calculating VAT, such that the taxpayer’s claim was not a claim for repayment of tax that was not due under section 80 VAT Act.
• Whether the change from one calculation method to another constituted a “decrease in consideration” within article 90 of the Principal VAT Directive and regulation 38 of the 1995 Regulations, permitting an adjustment without time limit.
• Whether HMRC’s Business Brief 07/07 required or invited bingo promoters to make retrospective adjustments under regulation 38 for all past periods.

Arguments

The Taxpayer’s Arguments

Mr Cordara QC argued that both methods of calculation were lawful, reflecting that apportionment of a unitary price may involve evaluative judgment within a spectrum of reasonable approaches. Accordingly, the tax paid using the game by game method was lawfully due, and the subsequent switch to the session by session method constituted a “decrease in consideration” triggering regulation 38. The business brief was said to have required or invited bingo promoters to make such adjustments.

HMRC’s Arguments

Mr Thomson QC submitted that on the agreed facts only the session by session method was correct. Any overpayment could only be recovered under section 80, subject to its three-year time limit. A change in method of calculation did not constitute a decrease in consideration within article 90.

Judgment

Lord Leggatt (with whom Lord Reed, Lord Hodge, Lord Lloyd-Jones and Lord Sales agreed) dismissed the appeal.

Only one correct method

The court held that, on the agreed facts, there was only one correct method of apportionment: the session by session basis. Consistency of approach in taxation is critical; permitting multiple lawful methods would offend the principle of equal treatment and distort competition. The court relied on MyTravel plc v Customs and Excise Comrs (Case C-291/03), which emphasised harmonisation of the taxable base to ensure VAT neutrality across member states.

Once the supply was identified as the right to participate in a session (reflected in the book of cards sold as a unit), the apportionment was a simple arithmetical calculation yielding only one correct answer: total fees received for each session less total cash prizes paid out in that session. The game by game method wrongly treated customers as paying separate fees for individual games.

Consequently, the overpaid VAT was tax “not due” to HMRC, and any claim for repayment fell within section 80. Given the three-year time limit in section 80(4), the claim for 1996-2004 was time-barred.

No decrease in consideration under article 90

Article 90 of the Principal VAT Directive requires a change in the consideration actually received by the supplier after the supply. A mere change in the method of calculating the taxable proportion of consideration already received does not engage article 90. The court endorsed Lord Drummond Young’s observation in the Inner House that what occurred was not a decrease in consideration in the real world between supplier and customer, but rather a re-attribution of tax liability within the taxpayer’s internal accounts.

The court distinguished Elida Gibbs Ltd v Customs and Excise Comrs (Case C-317/94), noting that the later cases confirm that case concerned article 90 and turned on the manufacturer’s actual refund of part of the price down the supply chain. No refund had been made by the taxpayer to anyone.

Effect of the Business Brief

HMRC guidance does not have legally binding force; it represents only HMRC’s interpretation of the law, as Lewison LJ explained in Leeds City Council v Revenue and Customs Comrs. The doctrine of legitimate expectation did not assist the taxpayer, as it was not seeking to hold HMRC to pre-2007 guidance.

The business brief used permissive language (“may make a claim”), and could only reasonably be read as inviting claims under section 80 subject to its time limit, not adjustments under regulation 38. The reference to “adjustments” related to the minor corrections provision under regulation 34 (for errors under £2,000) and not to regulation 38 decrease-in-consideration adjustments. Had HMRC invited adjustments under regulation 38 for this scenario, it would have been acting outside its powers.

Implications

The decision confirms several principles of importance for VAT practice:

• Where apportionment between taxable and non-taxable elements of a unitary price is required, the court will generally identify a single correct method rather than accepting that multiple lawful methods exist. Consistency and the neutrality of VAT are key drivers of this approach.
• A retrospective change in the method of calculating VAT liability does not constitute a “decrease in consideration” under article 90 of the Principal VAT Directive or regulation 38 of the 1995 Regulations. Regulation 38 is concerned with actual post-supply events reducing the consideration received, not with reanalysis of consideration already received.
• Claims for recovery of overpaid VAT where tax was “not due” fall exclusively within section 80 of the VAT Act 1994 and are subject to the statutory time limit (three years at the material time).
• HMRC guidance (briefs, notices and manuals) does not bind taxpayers or create legal obligations. It represents HMRC’s interpretation only. Taxpayers cannot leverage HMRC guidance to sidestep statutory time limits.

The practical significance is considerable for the approximately 14 pending cases said to be worth £30-40 million collectively. The decision forecloses retrospective reclamation of VAT outside the statutory time limit by recharacterising a change in calculation method as a decrease in consideration. Although VAT on commercial bingo was replaced by bingo duty in 2003, the principles concerning article 90, regulation 38, and the status of HMRC guidance have general application across VAT practice.

Verdict: Appeal dismissed. The Supreme Court upheld the Inner House’s decision reinstating HMRC’s assessment of VAT. The taxpayer’s attempt to reclaim output tax for 1996-2004 by way of a regulation 38 adjustment failed; any claim fell within section 80 of the VAT Act 1994 and was time-barred.

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