United Kingdom VAT & Duties Tribunals Decisions

 


Town and County Factors Ltd v Revenue & Customs [2006] UKVAT V19616 (24 May 2006)

19616

PARTIAL EXEMPTION – whether racing and sporting information broadcast on screens at licensed betting offices is exclusively attributable to exempt over the counter betting, or is attributable to all the supplies, including gaming machine, made through the licensed betting offices – the latter – appeal allowed

LONDON TRIBUNAL CENTRE

TOWN AND COUNTY FACTORS LIMITED Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS Respondents

Tribunal: DR JOHN F AVERY JONES CBE (Chairman)

JOHN N BROWN CBE FCA

Sitting in public in London on 18 to 20 April 2006

Jonathan Peacock QC and Philip Walford, counsel, instructed by Deloitte & Touche LLP, for the Appellant

Owain Thomas, counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1. These are two joined appeals by Town and County Factors Limited against assessments to VAT made on 15 March 2004 and 7 March 2005 in the sums of £1,077,998 and £78,747 relating to the treatment for partial exemption purposes of certain supplies to the Appellant. The Appellant is the representative member of the VAT group including Ladbrokes Limited and we shall refer to the Appellant to mean Ladbrokes unless the context requires a reference to the representative member. The Appellant was represented by Mr Jonathan Peacock QC and Mr Philip Walford, and the Commissioners by Mr Owain Thomas.
2. The issue in the appeal is whether the supplies consisting of the displays on screens, and the leasing of the screens themselves, in the Appellant's licensed betting offices ("LBOs") are attributable exclusively to exempt over-the-counter betting ("OTC betting"), as Customs contend, or to its general supplies, as the Appellant contends, in which case there is a special method, the details of which do not concern us. The assessments withdraw the deduction of a proportion of the input tax under the special method.
3. We heard evidence from Mr David Bowen, Development Services Director of the Appellant, Mr Bernie Campbell, Studio Controller, Mr Gordon Bissett, Racecourse Operations Controller, and Mr Andrew Wilson, Head of Financial Reporting and Control. Both parties gave us written submissions on the oral evidence following the hearing. We visited the Appellant's LBOs at Kingsway and Great Portland Street. We also had a DVD containing samples of pictures from the screens in the Appellant's LBOs.
4. We find the following facts:

(1) The inputs in question are supplies by SIS (first appeal), Sky TV and Sabrinet (second appeal), which we shall together call "the inputs." SIS is a company providing horse and greyhound racing information and television broadcast with commentary of the races onto screens in LBOs. The service also includes a general sports news programme. Some of the content is provided by the Appellant, such as odds for future events, and the rest by SIS. The Appellant can add its own commentaries in its studio and simultaneously re-broadcast the race via satellite to its LBOs (with a back-up landline). The Appellant has a team of 14 regular expert broadcasters who are knowledgeable on horseracing and greyhound racing and the majority of them on football. Commentary is normally added by the Appellant only for greyhound races. The Appellant uses the data from SIS and puts it into its own format for display on its screens using its own software and adding its own material, such as prices in advance of the starting prices which are SIS's starting prices. SIS also shows virtual racing (on which betting is possible) and lottery-type competitions. The service is essential to running an LBO. The SIS service is provided to all the Appellant's LBOs. Some of the content, known as "Ladbroke's Extra," including racing in Germany, France and the US is available only in the Appellant's LBOs. If for any reason the system goes down the LBO will empty quickly, although the Appellant can still take bets unless the cause is a power cut.

(2) Sky TV provides the basic service plus sport (plus an additional pay-per-view service for Sundays) which is charged for according to the number of LBOs taking it. It is up to the manager of the LBO in conjunction with his regional director whether to take the service; 640 of the Appellant's 2,000 LBOs did so at the time of Mr Bowen's witness statement but the figure has since increased. The Appellant originally installed Sky TV to compete with pubs to stop people leaving LBOs during football matches and other popular events like the Olympics. Except for very exceptional news items, Sky TV will show sports other than horse and greyhound racing, particularly football. Betting is possible for most of these sports, and for football it is (unlike horse and greyhound racing) possible to place bets during the game on such matters as who will score the next goal. There are some sports, such as cricket, sailing, golf and Australian rules football, where betting is non-existent or negligible, or the Appellant does not take bets on them. Repeats of football matches are invariably shown on Sky TV the following day, for which obviously there is no further betting.

(3) Sabrinet leases the plasma-type screens to the Appellant on a finance lease. The screens are arranged with a central large screen with eight smaller screens in two rows either side of it normally showing SIS information. The central one will show a race, and the screen can be split to show two races simultaneously. The screens on one side will have information about horseracing and on the other side greyhound racing, such as odds, runners and non-runners, and forthcoming races. When there is no information, particularly early and late in the day, up to two screens will show the Appellant's promotional information, such as opening times, advertising amusement machines (advertising FOBTs (see below) being the first priority), catering and diaries. Other screens normally show Sky TV sports broadcasts. Screens can also show terrestrial television programmes, although in practice only sport will be shown; this can be controlled via the SIS system. Further screens will be visible to staff only and will be used to provide currently about 1,600 pages of information to staff, such as when to turn screens over to Sky TV, or security announcements. Such information is used by the staff in connection with all the supplies made in an LBO.

(4) At Walthamstow Greyhound Stadium, which is independently owned, the Appellant has a LBO on the site from which SIS (but not Sky) transmissions are also made to the manager's and judges' offices. We saw an invoice providing for payment of £14.92 plus VAT for the period 4 to 31 December 2002. We were not given any information about how this was calculated. The contractual position is that SIS's written consent to such onward transmission is required. No such written consent has been provided but Mr Bowen spoke to SIS about it at the time of the take-over when the Appellant first became party to the arrangement, and he stated (and we accept) that he had obtained confirmation from the finance director for retail, Mr Chris Evans, that he had checked with SIS about their being aware of it. Mr Bissett knew that normally SIS required a track to pay the full price for the service.

(5) The SIS facility at stadiums enables the start of events to be delayed for a short time if there is late running of another race. We saw on our visit to two of the Appellant's LBOs a greyhound race delayed by the late running of a horse race, and also a split screen showing both a horse race and a greyhound race.

(6) Since May 2004 almost all of the Appellant's LBOs have four (which is the maximum allowed under an Association of British Bookmakers' Code of Practice) gaming machines. These are of two types, amusement with prize machines ("AWPs," also known as fruit machines), where the random element is controlled from within the machine, and fixed-odds betting terminals ("FOBTs," known in the Appellant's LBOs as "cash quest" machines) where the random element is controlled from outside the machine. Typically a FOBT will provide an electronic version of roulette. Larger stakes and winnings are permitted with FOBTs than with AWPs. FOBTs were introduced from 2001 and their number has increased from 1,255 at the beginning of 2003 to 6,124 in week 17 of 2005 (the current figure is about 7,000), while at the same time numbers of AWPs have decreased from 3,476 to 1,398. In London and the South East one invariably finds four FOBTs but the mix changes as you go North, so that Some Northern and Scottish LBOs have two FOBTs and two AWPs. We saw figures showing that in 1997 without the contribution of AWPs a number of LBOs would not have been profitable on the basis of expected profit from other activities after all overheads without the marginal income contribution from AWPs.

(7) At the time of the assessments AWPs were taxable (although the Appellant has since made a voluntary disclosure contending otherwise, which Customs do not accept; this is not a matter that we have to decide) and FOBTs were exempt from VAT. In 2004 99.8 per cent of the turnover was from OTC betting and FOBTs, 0.2 per cent from AWPs and under 0.1 per cent from catering and diaries. The equivalent figures taking into account payments out were 94.8 per cent OTC and FOBTs, 2.8 per cent AWPs, 0.3 per cent for catering and under 0.1 per cent for diaries. Since Customs' case is to attribute the inputs only to OTC betting these figures do not give the true current position because the exempt supplies include FOBTs. From 6 December 2005 FOBTs became taxable and one can see the exempt OTC betting supplies separately. Currently 69.1 per cent of takings are from FOBTs and AWPs (together referred to as "gaming machines"), 30.6 per cent from OTC betting, catering 0.02 per cent and diaries 0.001 per cent. After taking into account the payments out, the equivalent figures are 24.1 per cent, 73.3 per cent, 2.2 and 0.3 per cent.

(8) The gaming machines are positioned so that it is possible, though difficult and may involve turning round, for a person playing the machine simultaneously to watch the screens. The customer can listen to the commentary while playing a gaming machine, which will enable him to decide when to watch the screens.

(9) The Appellant's LBOs are open every day of the week including Sunday when there is some racing. Greyhound racing takes place on weekdays and Saturdays starting at 11.30 am until 6.30 pm and in the Summer it continues until 9.30 the evening. During this time two stadiums will have meetings with races at one starting seven minutes behind the other. LBOs normally have windows through which the interior can be seen from outside (except for 150 to 200 of them); previously this was not permitted. In the LBOs we saw the windows were partly obstructed by large floor-mounted posters but it was still possible to see in. The Great Portland Street LBO had frosted glass in the doors, which occurs only in LBOs with large doors. At one time the Appellant experimented with showing an SIS screen that was visible through the windows but this was abandoned as a result of problems seeing it with the sun on the screen. The Sky screen can be seen from outside the Kingsway LBO.

(10) Five of the Appellant's LBOs, including the Kingsway one we visited, have café style seating just inside the entrance with a selection of drinks and hot and cold food in view of the screens or some of them. About 75 per cent of the rest of the LBOs have a coffee machine for which the customer purchases a sachet, and a chiller cabinet containing cold drinks. The cabinet will have an alarm alerting the staff when opened who can make sure that the customer pays for what he removes from the cabinet. In the Great Portland Street LBO for space reasons the cabinet was behind the staff counter so that a customer would have to obtain the item from the staff member. About 25 per cent of LBOs provide no catering but might provide a coffee for payment on request. In a few LBOs provide free vending where there is local competition doing so. Apart from the five LBOs providing café style seating, the figures for catering are small, although the Appellant tries not to run it at a loss (ignoring an allocation of a proportion of general overheads, such as staff and electricity). In some of the summaries of results for LBOs we saw there was a loss on occasion. On average of the LBOs providing catering turnover is £1,124 per LBO pa, which is about £3.60 per day, but this adds up to £1.7m pa in total.

(11) Some LBOs also have an internet point with access only to the Appellant's website and also email facilities. Daily newspapers are also available to customers.

(12) At the appropriate time of the year the Appellant's diaries are on sale at LBOs at £1 including VAT (to include a £1 bet).

(13) Mr Bowen, who has worked for the Appellant since 1971, considered (and we accept) that the existence of the SIS and Sky TV service attracted people to use gaming machines in addition to OTC betting. He knew of a venue close to one of the LBOs where they had just gaming machines and he knew that the Appellant's FOBTs were used more than the other shop's. Most of the Appellant's competitors will also have FOBTs and vending facilities. He described the screens as the central focus of the LBO. The existence of the screens and gaming machines has encouraged younger customers to visit their LBOs. The coverage of the Appellant's SIS service is greater than that of their competitors. The SIS service keeps people in the LBO. People who do not normally go to LBOs will come in to watch a World Cup match and not all will bet. Mr Bernie Campbell, who has worked for the Appellant for 30 years, considered (and we accept) that people are attracted into LOBs by SIS or Sky "because they provided an exciting presentation of an event whose outcome is yet to be decided so it is better than standing on the street and being bored."

(14) A customer survey conducted by RMS in each LBO from 29 January to 8 February 2003 for reasons unconnected with this appeal tracked 40 people per LBO. For example, in Birmingham the survey showed that 70 per cent of customers made a bet and the customers were in the store for an average of 9 minutes. For other locations the percentages and times were 73 per cent, 19 minutes (Islington), 63 per cent, 20 minutes (Derby), 78 per cent, 14 minutes (Ilford), 53 per cent 10 minutes (Manchester) and 88 per cent, 25 minutes (Coles Green).

(15) In its management accounts for each LBO the Appellant takes the OTC betting income, then deducts items controlled by the manager (salaries, Sky rental, lighting and heating etc) to give an OTC contribution figure. Vending (catering) is shown separately with the income and direct costs. AWPs and FOBTs are shown separately with their income net of payments out, and direct costs. Next head office controlled costs are deducted (including SIS and property costs). Finance costs are then deducted (including depreciation on the screens leased from Sabrinet; the interest element is not apportioned to LBOs). The final figure is the shop contribution to profits. Sales of diaries are not recorded per LBO in these accounts.

(16) The Appellant owns two greyhound racing stadiums, Monmore and Crayford. The Appellant sells advertising at these stadiums including advertising boards at the traps and along the perimeter of the tracks, which is liable to VAT. The camera will move past some of these quickly but six points are covered by cameras with still shots in which advertisements can be seen, including during the time before and after races. In selling such adverting the brochures make the point that the event is broadcast by SIS to 10,000 LBOs (of which about 2,000 are the Appellant's) and are seen by 1m people. This enables the Appellant to charge higher prices for such advertising than if it were not shown on SIS. Many of the advertisers are local firms but some with interest outside the locality such as the Charlton Athletic Football Club, the local club at Crayford. A smaller number are national firms, some of which make supplies to the Appellant, have three-year contracts for advertising. Advertisers will often make a composite arrangement for say a number of seats at the restaurant for an event which will include advertising in the brochure or on the track. We did not see any contracts for advertising.

5. We make some further inferences of fact from the facts found above. Although the survey (see paragraph 4(14)) is incomplete in that it does not record the non-betting activity because it was not prepared with this appeal in mind, it does show that a significant percentage—varying from 12 to 47 per cent—of people go into an LBO and do not, at least on that occasion, place an OTC bet. While we do not know the time of day the survey was carried out we are prepared to assume that it was not at an atypical time, otherwise there would be no point in conducting a survey. This result was confirmed by the witnesses as their experience, and from our very limited experience visiting two of the Appellant's LBOs, particularly in Great Portland Street, where there was more activity with people using all the four FOBTs and other people waiting to use them, than there was at the counter. Having seen two LBOs the bank of screens are prominent and it would be difficult to ignore them particularly with the commentary; Mr Bowen aptly described them as the central focus of the LBO. Conversely it is possible to make a bet, perhaps of a future event, without watching the screens at all, although we would expect that such a person would at least glance at them while in the LBO. We also know that currently around 70 per cent of takings and 24 per cent of the profit contribution is from gaming machines, and so we are not dealing with a minor activity. We can infer that there are people who go into them to watch a race or other sporting event on SIS or Sky without any intention of making an OTC bet. In the LBO there is an atmosphere of excitement from the screens showing racing with the commentary that may encourage them to use the gaming machines as well as, or instead of, making OTC bets. The existence of catering is likely to encourage people to remain in the LBO for a longer period.
6. The First VAT Directive introduced the concept of cost component in article 2:

"On each transaction, value added tax, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components."

Article 17 of the Sixth Directive contains detailed provisions about deduction:

Origin and scope of the right to deduct

1 The right to deduct shall arise at the time when the deductible tax becomes chargeable.

2 In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:

(a)  value added tax due or paid within the territory of the country in respect of goods or services supplied or to be supplied to him by another taxable person;….

5 As regards goods and services to be used by a taxable person both for transactions covered by paragraphs 2 and 3, in respect of which value added tax is deductible, and for transactions in respect of which value added tax is not deductible, only such proportion of the value added tax shall be deductible as is attributable to the former transactions.

In domestic legislation Regulation 101 of the VAT Regulations deals with attribution:

"…(2) In respect of each prescribed accounting period—

(a) goods imported or acquired by and ... goods or services supplied to, the taxable person in the period shall be identified,

(b) there shall be attributed to taxable supplies the whole of the input tax on such of those goods or services as are used or to be used by him exclusively in making taxable supplies,

(c) no part of the input tax on such of those goods or services as are used or to be used by him exclusively in making exempt supplies, or in carrying on any activity other than the making of taxable supplies, shall be attributed to taxable supplies, and

(d) there shall be attributed to taxable supplies such proportion of the input tax on such of those goods or services as are used or to be used by him in making both taxable and exempt supplies as bears the same ratio to the total of such input tax as the value of taxable supplies made by him bears to the value of all supplies made by him in the period."

7. There is no substantial disagreement about the law. It is common ground first, that that there must be a direct and immediate link between the input and the taxable output, which is derived from the cost component requirement in the First Directive, and secondly, in determining this the Appellant's purpose is not relevant, see for example BLP Group v Customs and Excise Commissioners, Case C-4/94 [1995] STC 424 at [19]:

"The use in that provision [art.17(5)] of the words 'for transactions' shows that to give the right to deduct under para 2, the goods or services in question must have a direct and immediate link with the taxable transactions, and that the ultimate aim pursued by the taxable person is irrelevant in this respect."

In that case the direct and immediate link was between the services of the merchant bankers, solicitors and accountants in connection with the sale of shares which was the subject matter of their advice. It was irrelevant that the purpose of the sale of shares was to raise money for its taxable transactions. Similarly in Midland Bank plc v Customs and Excise Commissioners Case C-98/98 [2001] STC 501 the input was solicitors' services in defending the bank against an action for negligence arising out of a takeover which the bank had acted as merchant bank. The European Court equated cost components with the direct and immediate link test (italics added):

"30. It follows from that principle as well as from the rule enshrined in the judgment of BLP Group plc v Customs and Excise Comrs (Case C-4/94) [1995] STC 424 at 437, [1995] ECR I-983 at 1009, para 19 according to which, in order to give rise to the right to deduct, the goods or services acquired must have a direct and immediate link with the taxable transactions, that the right to deduct the VAT charged on such goods or services presupposes that the expenditure incurred in obtaining them was part of the cost components of the taxable transactions. Such expenditure must therefore be part of the costs of the output transactions which utilise the goods and services acquired. That is why those cost components must generally have arisen before the taxable person carried out the taxable transactions to which they relate."

The Court of Appeal in Dial-a-Phone Limited v Customs and Excise Commissioners [2004] STC 987 at [28] made the same connection between cost component and the direct and immediate link. Where such direct and immediate link is missing and the input forms part of the general costs of the business a proportion of the tax is deductible. The European Court in Midland Bank continued (italics added):

"31. It follows that, contrary to what the Midland claims, there is in general no direct and immediate link in the sense intended in BLP Group, between an output transaction and services used by a taxable person as a consequence of and following completion of the said transaction. Although the expenditure incurred in order to obtain the aforementioned services is the consequence of the output transaction, the fact remains that it is not generally part of the cost components of the output transaction, which art 2 of the First Directive none the less requires. Such services do not therefore have any direct and immediate link with the output transaction. On the other hand, the costs of those services are part of the taxable person's general costs and are, as such, components of the price of an undertaking's products. Such services therefore do have a direct and immediate link with the taxable person's business as a whole, so that the right to deduct VAT falls within art 17(5) of the Sixth Directive and the VAT is, according to that provision, deductible only in part."

An illustration of this is found in Kretztechnik AG v Finanzamt Linz Case C-465/03, [2005] STC 1118 in which a company raised funds by an issue of shares on the Stock Exchange. The share issue for the purpose of raising capital for general purposes was not a supply and the costs of the issue were therefore to be treated as overheads:

"36. In this case…it must be considered that the costs of the supplies acquired by that company in connection with the operation concerned form part of its overheads and are therefore, as such, component parts of the price of its products. Those supplies have a direct and immediate link with the whole economic activity of the taxable person."

8. Finally, the European Court gave guidance in general terms as to the nature of the direct and immediate link:

"25. In so far as the national court seeks, in the first part of the second question, clarification of the nature of the 'direct and immediate link', the Midland, the United Kingdom government and the Commission rightly agree that it would not be realistic to attempt to be more specific in that regard. In view of the diversity of commercial and professional transactions, it is impossible to give a more appropriate reply as to the method of determining in every case the necessary relationship which must exist between the input and output transactions in order for input VAT to become deductible. It is for the national courts to apply the 'direct and immediate link' test to the facts of each case before them and to take account of all the circumstances surrounding the transactions at issue."

9. In the domestic courts in Customs and Excise Commissioners v Southern Primary Housing Trust [2004] STC 209 the taxpayer purchased land under a taxable transaction and then sold the land and entered into a contract to provide development services to the purchaser. The Court of Appeal held that there was insufficient direct and immediate link between the purchase of the land and the development contract. A "but for" test was not the same as a direct and immediate link and that a commercial linkage is insufficient Jacob LJ, with whom Mantell LJ and Lord Phillips of Worth Matravers MR concurred, said:

"[32] But there is substance in Mrs Hall's [counsel for Customs] remaining points (which, by and large) are different ways of looking at the same question. I particularly consider that point (d) [that the tribunal applied a test of whether the input enabled the taxpayer to make a taxable supply] is right. The land purchase transaction was commercially necessary to make its performance commercially possible, but it was not a cost component of the contract itself in the same way as the costs of materials used. There is a link with the contract but the link was not direct and immediate. The development contract would not have been made but for the associated land purchase and sale. But 'but for' is not the test and does not equate to the 'direct and immediate link' and 'cost component' test.

[33] One can look at it another way. There is nothing about the development contract as such which makes the land purchase and sale essential. If the housing association had already owned the land or had bought it from some third party, the inputs of the development contract would have been just the costs of carrying it out. The fact that there were commercially linked land transactions does not mean that those transactions are directly linked to the costs of the development contract. One would not say that the cost of buying the land was a cost of the development contract itself. It follows that the input tax on that cost is not a cost of the contract."

In [33] Jacob LJ Court states that the land purchase and sale were not essential to the development contract thereby apparently going much further than disagreeing with a "but for" test by substituting an "essential ingredient" test. We do not consider that this was intended and his Lordship was merely making the point that the input not being essential was an alternative argument against the existence of a direct and immediate link. It would not follow that there can never be a direct and immediate link from a non-essential input.

10. In Dial-a-Phone the company sold mobile phones with an initial three month free insurance and thereafter the purchaser could pay to continue the insurance, although a purchaser could refuse the free insurance and take just the phone (see [4(ix)]). The taxpayer received taxable commission from service providers and exempt insurance commission. It incurred advertising expenses which it sought to attribute to the sale of phones only, whereas Customs sought to attribute it to both the taxable and exempt outputs. The tribunal agreed with Customs and their decision was upheld by the Court of Appeal:

"[74] As to Mr Anderson's [counsel for the taxpayer] submissions directed at the factual relationship between the insurance intermediary services and the taxable supplies made by DaP (and in particular his submissions regarding timing), it is important to bear in mind that (as the Advocate General observed in Abbey National (see [29] above) [that 'As the Commission submitted at the hearing, the conclusion to be drawn from [BLP] is that the question to be asked is not what is the transaction with which the cost component has the most direct and immediate link but whether there is a sufficiently direct and immediate link with a taxable economic activity']) a 'direct and immediate link' may exist between the marketing and advertising costs and the insurance intermediary services despite the fact that there may be an even closer link between those costs and DaP's taxable supplies. In other words, the quest is not for the closest link, but for a sufficient link.

[75] It follows that it matters not that the insurance intermediary services may be viewed as being in a commercial sense secondary to the making of the taxable supplies, or even that they may be provided only after a taxable supply has been made, provided that a sufficient 'direct and immediate link' exists between them and the marketing and advertising costs.

[76] In any event, however, I reject Mr Anderson's submissions that from DaP's point of view the provision of insurance intermediary services was secondary to the making of taxable supplies; and that in terms of timing such services were only provided after a taxable supply had been made.

[77] As to the suggested 'secondary' nature of the insurance intermediary services, DaP's entitlement to commission under the heads of agreement between DaP and Cornhill represented a substantial proportion of its income during the relevant period. Insurance with Cornhill was part of the package of services advertised by DaP. To my mind, the fact that the advertisements referred only to the initial free three-month period of insurance is hardly surprising, and says nothing as to the relative importance to DaP of the insurance element of the package as compared with the making of taxable supplies."

While there was a greater link between the advertising and the phone, it did not mean that there was not also a sufficiently direct and immediate link to the insurance even though the advertising referred only to the three-months free insurance.

11. In Mayflower Theatre Trust Limited v HMRC Commissioners, 31 March 2006 not yet reported, the cost of putting on performances at the theatre was financed as to about 80 per cent by exempt ticket sales and as to about 20 per cent from taxable sales of programmes, food and drink, sale of sponsorship rights, corporate entertainment, sale of merchandise, opera glasses etc. The inputs were productions bought in from production companies. The Tribunal found that there was insufficient connection between the inputs being the payments to production companies and the taxable supplies. Hart J reversed their decision finding sufficient connection between the inputs and both taxable and exempt supplies. At [49] he concluded:

"…The argument [for the Appellant] was simply that the inputs were directly and immediately linked with the exempt supplies of tickets to the general public because the production costs had been incurred for the purpose of producing the show to which the public would be granted admission. If the appellant was also earning income from granting a right of admission under the umbrella of a taxable supply there could be no difference in principle, so far as the directness and immediacy of the link was concerned, between the exempt and the taxable supplies. I found that argument compelling."

The case is another illustration of there being a more direct link between the input of the production and the output of the ticket sales to the public to see the production, but a sufficiently direct link between the production input and the other (taxable) outputs which helped to finance the performance of the production.

12. Mr Peacock QC and Mr Walford, for the Appellant, contend in outline:

(1) The inputs are factually used for all aspects of the LBOs business and are general costs of the business as in Midland Bank at [31].

(2) Alternatively, there is a substantial factual link between the inputs and the taxable as well as exempt supplies. The customers are attracted into the LBOs by all of the services on offer, including the inputs. The screens are used for all aspects of the business and not just for exempt betting.

(3) The price for the supply of advertising at Monmore and Crayford was directly linked to the Appellant's purchase of SIS services, even though it was also affected by the purchase of the SIS service by other LBOs not owned by the Appellant.

(4) The onward supply at Walthamstow Greyhound Stadium was a supply of the identical service obtained from SIS which could not be more direct and immediate.

13. Mr Thomas, for Customs, contends in outline:

(1) The only ways in which a cost can be residual for VAT purposes is if it has a direct and immediate link to (or is a cost component of) particular exempt and taxable supplies; or if it does not have a direct and immediate link to (or is not a cost component of) any specific supply and thus for VAT purposes is a general overhead.

(2) Given the direct and immediate link with exempt OTC betting there is no room for the argument that the inputs are to be treated as general overheads of the business.

(3) This is so regardless of the accounting treatment, which is in any case inconsistent.

(4) The most that can be said of the inputs is that they have some indirect link with the making of taxable supplies since if the Appellant did not have the inputs as many of its competitors do then many customers would not be so inclined to use the Appellant's LBOs and may go elsewhere, which may to some degree affect its ability to make taxable supplies. The connection is insufficient.

(5) The Appellant's argument is a "but for" argument disapproved in Southern Primary Housing Trust, that but for the inputs it would sell less of the other outputs. The connection contended for by the Appellant is even weaker than a "but for" connection.

(6) The inputs are not necessary for the making of taxable supplies points to the conclusion that they are not cost components of those supplies. A customer can play a gaming machine or buy catering regardless of whether the inputs exist.

(7) The charges for the inputs are per LBO and are the same whether or not the LBO provides gaming machines or catering. The fact that the charges for the inputs do not change depending on the level of taxable supplies underlines the difference between those costs and overheads, at least some of which would increase depending on the level of taxable supplies.

(8) Attracting customers into the LBO is not a supply. It is a preliminary step which may or may not result in a supply being made and does not help to establish whether the inputs are a cost component of any particular type of supply. Just because a particular cost has the effect of bringing customers into the LBO does not establish that it is to be considered to be a cost component of every type of supply made in the LBO. SIS, with its close connection to OTC betting, is very different from other general overheads such as the decor and lighting and heating.

(9) The advertising supplies made at Monmore and Crayford were advertised as reaching 10,000 LBOs because of SIS. If the Appellant's LBOs were excluded there would still be 8,000 others and so the inputs were only tenuously connected with the supply, not amounting to a direct and immediate link.

(10) In relation to the onward supplies of SIS services at Walthamstow Greyhound Stadium the Appellant was not permitted to make such an onward supply without the written consent of SIS and at best there was an oral consent. Assuming they consented, there was no consideration for their consent and so they did not make a supply. No part of the cost of the SIS service could be attributed to the onward supply.

Reasons for our decision

14. Both article 17 of the Sixth Directive and Regulation 101 depend on the use to which the inputs are put by the trader: in the Directive "used for the purposes of his taxable transactions" and in the Regulation "used or to be used by him exclusively in making taxable [or exempt] supplies." Use for a transaction means that the input in question must have a direct and immediate link with the transaction, or that it must be a cost component of the transaction. This is not a case of an input being a component in particular goods, thereby having an obvious direct and immediate link to the supply of the goods. For that reason we shall concentrate on the direct and immediate link rather than cost component. No doubt the SIS information is used internally as the means of knowing who has won a bet, but we are more concerned with a different use, that of the Appellant making the information available on screens to the public who enter LBOs.
15. SIS screens contain information about odds and pictures of horse and greyhound racing with commentary which can directly be used for placing OTC bets. The Sky screens display information about other sports that mainly, though not exclusively, can be used for placing OTC bets. The leased screens show both SIS and Sky content and additionally can show terrestrial television containing sporting events that can be used for such betting. The screens are different in nature from other general overheads in being more closely related to betting. There is therefore an immediate attraction in Mr Thomas' contention, which he put forward very persuasively, that one should attribute the inputs exclusively to OTC betting.
16. The problem we have with his contention is that we are concerned with the use of the inputs by the Appellant, not by the customer. The use by the Appellant of the inputs is to make the screens available to any member of the public who enters its LBOs, whether or not they bet. The Appellant does not, and could not, restrict access to its LBOs to those who intend to place bets, and we have accepted the evidence of the Appellant's witnesses and the survey that a substantial proportion of customers watch the screens but do not place OTC bets. Making the screens available to those entering its LBOs is in our view analogous to a trader giving free samples as a means of advertising. The trader hopes that the recipient will be persuaded to buy the product, but it has to accept that the sample will be used and enjoyed by some people who have no intention of buying the product. The Appellant uses the inputs not only for taking OTC bets but to advertise the LBOs by making these and other facilities available to those visiting them in the hope that the public will visit LBOs or stay in them longer and purchase any supplies that are available to them. We appreciate that the Appellant's aim is not the issue but, regardless of the aim, it is objectively the case that the screens, particularly the central one showing the sporting event and the Sky screen, can be seen and enjoyed by anyone visiting the LBOs whether or not he places an OTC bet. As such it encourages the customer to enter the LBO and use any of the facilities available for purchase there. It might be objected that this is advertising to those who have already entered the LBO but the knowledge obtained from others who have done so, or even by looking through the window, means that other members of the public can be attracted to enter the LBO by this means. It cannot therefore be said that the inputs are used exclusively for OTC betting.
17. While there is clearly the most direct and immediate link between the inputs OTC bets by those who make them, we must also consider whether there is also a sufficient direct and immediate link between them and other supplies made in the LBO. Mr Thomas made the point that one cannot easily play a FOBT and watch the screens at the same time, which Mr Peacock countered by saying that it was possible to see the screens even if it required turning round or listening to the commentary to decide when to do so. We do not consider this to be relevant. If a member of the public comes into an LBO to watch a sporting event that he could not otherwise watch because it is not on terrestrial television and he does not subscribe to Sky but without having any intention of placing an OTC bet, the Appellant will still have used the inputs to persuade him into the LBO. The Appellant may, after watching the event, use a gaming machine or their catering, and there is nothing that the Appellant can do if instead he leaves immediately after watching the event without purchasing any supplies. While we agree that the inputs are different in nature from purely general overheads because of their close link to betting, in this respect they are no different from other advertising expenditure. By creating an exciting atmosphere in the LBO they are encouraging the use of gaming machines as well as OTC betting. Are those other supplies within the direct and immediate link to the inputs taking account of all the circumstances surrounding the transactions at issue? We consider that they are. By regarding the screens as in part advertising the LBOs, the link is to any supplies leading directly from the advertising. We regard the supplies other than OTC betting resulting from the presence of the person in the LBO as being sufficiently direct and immediate. To say otherwise is to regard the public viewing the screens without betting as a necessary evil, which is unrealistic, particularly when a substantial part of the turnover of the business is taken in gaming machines. We regard the other supplies made by the Appellant at the LBOs, particularly of gaming machines as sufficiently direct and immediate even though, as in Dial-a-Phone, there was another closer link to OTC betting and the other supplies might be secondary in a commercial sense. In coming to this conclusion we do not give any weight to the way the Appellant prepares its management accounts. Expenses are dealt with according to who controls them and some overheads, such as salaries are deducted from OTC betting income while others are deducted elsewhere. As Hart J said in Mayflower Theatre "it is difficult to see why expenses incurred in marketing and publicising the theatre are not incurred both in respect of its exempt and its taxable supplies."
18. We should also explain why we have rejected some of the arguments put forward by Mr Thomas. He makes a distinction between an input either having a direct and immediate link to particular supplies, or not having a direct and immediate link to any specific supply and thus being a general overhead, so that if there is such a link to OTC betting it cannot be an overhead. We consider that here there is no real distinction between the two in this case. The inputs have a direct and immediate link to all the supplies made from the LBO, and so they are a general overhead. Next he describes Mr Peacock's argument as a "but for" argument, that but for the inputs the Appellant would sell less of its taxable supplies. The point, it seems to us, is that a "but for" connection is not sufficient; the converse, that if there is a "but for" connection there cannot be a direct and immediate connection, does not follow. The same is true of the fact that the inputs are not necessary for the making of taxable supplies. It does not follow that there cannot be a direct and immediate connection from an input that is not necessary; phones, though no doubt fewer in number, could have been sold in Dial-a-Phone if there had not been any advertising but this did not prevent there being a direct and immediate connection between the advertising and both the taxable and exempt supplies. In relation to his argument that attracting customers into the LBO is not a supply, but is only a preliminary step which may or may not result in a supply being made, we agree with this but not the conclusion he seeks to draw from it, that just because a particular cost has the effect of bringing customers into the LBO does not establish that it is to be considered to be a cost component of every type of supply made in the LBO. He is perfectly correctly knocking down a "but for" argument, but the real question is whether it does in fact create such a direct and immediate link to every type of supply made in the LBO. We consider that the inputs are similar in nature to the advertising input in Dial-a-Phone although there the advertising did refer to the free insurance for the first three months, and so the link to the secondary supply was clearer, particularly as unless one bought a phone there was nothing to insure. Here the link to supplies made in LBOs other than OTC betting may be weaker, but we consider that the principle in Dial-a-Phone, that one must ask whether the connection to each supply is sufficiently direct and immediate, is applicable here. We consider that the link between the inputs and all the supplies made at the LBO is sufficiently direct and immediate.
19. We consider that there is a direct and immediate link between the SIS (but not Sky or Sabrinet) inputs and the supply made by the Appellant of SIS material to the manager and judges at Walthamstow Greyhound Stadium. The supply to and by the Appellant are of the same service and it is impossible for there to be a more direct and immediate link. Mr Thomas contended first that the Appellant was not permitted to make such an onward supply without the written consent of SIS and at best there was an oral consent, and secondly, that since the price paid by for the SIS supply to the LBO at the stadium was the same as that paid by any other LBO no part of the input tax is used for making the onward supply. We do not regard the contractual position as relevant; the fact is that the Appellant does make an onward supply and we have found that SIS are aware of this even though they try to obtain a normal price from greyhound tracks. The second point is dealt with by Mayflower Theatre Trust where at [44] Hart J points out that no reliance was placed on any finding that the price charged for the insurance intermediary services had been calculated by reference to the cost of the advertising and marketing inputs in Dial-a-Phone. Here the Appellant pays a total amount to SIS which may be calculated by reference to the number of LBOs and so even though one cannot identify an additional cost to the particular LBO at Walthamstow that does not prevent part of the total cost being attributed to the onward supply.
20. In relation to advertising at Crayford and Monmore we have accepted that advertisers are attracted by the fact that advertisements, particularly at six points where the camera will be still and showing the advertisement, will be seen on SIS screens by those in LBOs (whether the Appellant's 2,000 LBOs or 8,000 LBOs belonging to others). We consider that there is a direct and immediate link between SIS, being the method by which the Appellant can distribute the benefits of the advertising, and the advertising outputs. Advertising reaching more people must be more valuable than advertising reaching only those attending the two stadiums, which is low in the afternoons, and so can be sold by the Appellant at a higher price. If the Appellant did not have SIS but the 8,000 other LBOs did it would be reasonable to infer that the price at which advertising could be sold would be lower. While such a price link is not necessary to the existence of a sufficient direct and immediate link, as was the case in Dial-a-Phone, where such a price link exists it is evidence to support a direct and immediate link.
21. Accordingly we allow the appeal. We direct Customs to pay the Appellant's costs of, incidental to, and consequent upon, the appeal to be assessed in default of agreement by a Taxing Master of the Supreme Court of Justice in England and Wales by way of detailed assessment on the standard basis.
22. Mr Peacock mentioned that some of the information, particularly figures that we had been given, was commercially sensitive. We issue this decision initially to the parties alone and request that the Appellant inform the Chairman within 14 days of the date of release of this decision of any information that it objects to being disclosed on the grounds of commercial secrecy, and we shall endeavour to meet their objection in the decision that will be released to the public. If figures are confidential it would be helpful if the Appellant indicates what alternatives (such as saying "over 75 per cent" rather than giving the exact figure) would satisfy them.

JOHN F AVERY JONES

CHAIRMAN

RELEASE DATE: 24 May 2006

LON/04/0791 (amended)