Revenue and Customs v London Clubs Management Ltd (Rev 1) [2020] UKSC 49

London Clubs Management provided free non-negotiable chips and vouchers to gamblers as promotions. The Supreme Court held these 'Non-Negs' were not 'stakes staked' with any value in money or money's worth for gaming duty purposes, dismissing HMRC's appeal.

Facts

London Clubs Management Ltd (LCM) operates casinos offering games such as blackjack, punto banco and American roulette. To incentivise selected gamblers, LCM provided, free of charge, non-negotiable gaming chips and various forms of free bet vouchers (collectively, ‘Non-Negs’). Unlike ordinary cash chips, Non-Negs could not be encashed or exchanged for goods or services, and could only be used to place bets. Where a gambler lost a bet placed with a Non-Neg, the dealer placed it in the drop box. Where the gambler won, winnings were paid in cash chips and (for certain types) the Non-Neg was returned to the gambler for further use.

From 2008 LCM included the face value of Non-Negs retained in drop boxes within its calculation of ‘banker’s profits’ for the purposes of gaming duty under section 11 of the Finance Act 1997. Having reviewed that practice, LCM claimed repayment of approximately £1.97m of gaming duty it said had been overpaid between 1 October 2008 and 30 September 2012. HMRC refused the claim. The FTT dismissed LCM’s appeal, but the Upper Tribunal allowed it, and the Court of Appeal dismissed HMRC’s further appeal. HMRC appealed to the Supreme Court.

Issues

The Supreme Court had to decide:

1. Whether Non-Negs are ‘stakes’ staked with the banker for the purposes of section 11(10)(a) of the Finance Act 1997;
2. What ‘value, in money or money’s worth’ (if any) Non-Negs have under section 11(10)(a); and
3. What ‘value’ (if any) Non-Negs should be given for the purposes of section 11(10)(b), read with section 20 of the Betting and Gaming Duties Act 1981 as applied by section 11(10A) FA 1997.

Arguments

HMRC

HMRC contended that Non-Negs are stakes staked because they are treated as stakes under the rules of the game in which they are played, and should be valued at their face value since this is the value attributed to them in the game. They argued that this game-based approach reflected the commercial reality that Non-Negs function as incentives because they can be staked at face value and confer an entitlement to cash winnings. HMRC further submitted that, in the interests of consistency, Non-Negs provided as prizes should also be valued at face value under section 20 of the BGDA.

LCM

LCM argued that Non-Negs are not ‘stakes staked’ because staking inherently involves putting something of value at risk, and a Non-Neg has no value: the gambler risks nothing and the banker gains nothing when a Non-Neg is lost. In the alternative, if a Non-Neg is a stake, its value in money or money’s worth is nil. The same treatment should follow for Non-Negs returned as prizes, which should be regarded as having no value under section 20(4) BGDA.

Judgment

The Supreme Court (Lord Kitchin giving the lead judgment, with whom Lord Carnwath and Lady Black agreed; Lord Sales agreeing on issues (i) and (ii) but dissenting on issue (iii); Lady Arden concurring in the result but for materially different reasons) dismissed HMRC’s appeal.

Nature of cash chips

Lord Kitchin began by reviewing Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, noting that gamblers gamble for money rather than chips, and that cash chips are merely a convenient mechanism for facilitating gambling with money. When a gambler uses cash chips to bet, he is staking the money those chips represent, which has been deposited with the casino.

Issues (i) and (ii) – Non-Negs as stakes staked

Lord Kitchin held that the assessment of banker’s profits must be conducted from the perspective of the banker, since it is the banker’s profits that contribute to the gross gaming yield. The phrase ‘money or money’s worth’ in section 11(10)(a) emphasises that it is the actual, real-world value of stakes in the hands of the banker that matters; the provision is concerned with stakes which are or represent money, or which can be converted into money. Reference was made to Aspinalls Club Ltd v Revenue and Customs Comrs [2015] Ch 79, which supported a focus on real-world value and the game itself.

Although Non-Negs have real-world value to the gambler (conferring a right to bet without risking the gambler’s own money), they do not represent money to which the gambler is entitled, cannot be encashed, and cannot be exchanged for goods or services. When a Non-Neg is lost, no money is appropriated and no right to money passes to the casino; from the casino’s perspective, the Non-Neg amounts to a free bet. Thus a Non-Neg has no real-world value to the casino, is not a ‘stake staked’, and does not contribute to ‘banker’s profits’ within section 11(10), regardless of whether it is assignable.

On the ‘diamond necklace’ hypothetical, the court rejected both parties’ analyses, concluding that the objective real-world value of whatever is staked is what matters, and an agreed value between casino and gambler, while evidentially significant, is not determinative.

Issue (iii) – Non-Negs as prizes

Although unnecessary to dispose of the appeal, Lord Kitchin addressed the valuation of Non-Negs returned as prizes. He held that Non-Negs do not satisfy section 20(3)(a) of the BGDA because a gambler using a Non-Neg to place a bet is not using it ‘in place of money as whole or partial payment for benefits of a specified kind’; rather, he is playing a game of chance in which the casino treats him as having put money to the value of the Non-Neg at risk. Consequently, Non-Negs returned as prizes have no value under section 11(10)(b). Lord Kitchin reasoned that any other interpretation would produce an incoherent scheme unduly favourable to casinos, under which Non-Negs would not contribute to banker’s profits when lost but would reduce those profits when returned to winning gamblers.

Lord Sales’ partial dissent

Lord Sales agreed on issues (i) and (ii) but held that a Non-Neg given as a prize does satisfy section 20(3)(a) and (b) and is not caught by section 20(4), so should be brought into account at face value under section 11(10)(b). He considered that this reflected the real economic cost of the Non-Neg to the banker.

Lady Arden’s concurrence

Lady Arden agreed with the outcome but considered that ‘value’ in section 11(10)(a) should be assessed by objective open-market valuation rather than solely from the banker’s perspective. However, because HMRC had not adduced evidence of any market value, the appeal failed on the facts.

Implications

The decision clarifies that, for gaming duty purposes under section 11(10) of the Finance Act 1997, stakes staked must be valued by reference to their real-world economic value to the banker, expressed in money or money’s worth. Promotional items which confer no real monetary value on the casino, such as non-negotiable chips and free bet vouchers, will not be included in the calculation of banker’s profits when lost in play. Correspondingly (on the majority’s view), they will not reduce banker’s profits when returned as prizes.

The judgment confirms the approach taken in Aspinalls: the focus under section 11(10) is on the game itself and the economic substance of stakes and prizes, not on wider marketing activities, commissions, or promotional expenses. Casinos deploying promotional incentives of this kind will therefore not be taxed on the notional face value of free bet tokens.

The decision is significant for the gaming industry and for HMRC’s approach to gaming duty on promotional schemes. However, its scope is limited: it turns on the particular statutory language of section 11(10) and the specific features of the Non-Negs in issue. Lady Arden’s reasoning leaves open the possibility that, on different evidence showing a market value for such tokens, a different result might be reached. Lord Sales’ dissent also identifies a residual question as to whether the interaction of sections 11(10A) and 20 BGDA produces asymmetry in the valuation of Non-Negs as stakes and prizes respectively. Practitioners advising casinos or HMRC should therefore treat the decision as confined to the facts and statutory scheme considered, while recognising the general principle that real-world value to the banker drives the statutory calculation.

Verdict: Appeal dismissed. Non-negotiable gaming chips and free bet vouchers are not ‘stakes staked’ and have no ‘value in money or money’s worth’ for the purposes of section 11(10)(a) of the Finance Act 1997, and (per the majority) have no value as prizes under section 11(10)(b).

Source: Revenue and Customs v London Clubs Management Ltd (Rev 1) [2020] UKSC 49