United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2008] UKVAT V20688, [2008] BVC 2482, [2008] V & DR 235

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The Rank Group plc v Revenue & Customs [2008] UKVAT V20688 (27 May 2008)

20688

EXEMPT SUPPLIES – Gaming – Mechanised cash bingo under Gaming Act 1968 s.14 excluded from exemption – Similar supplies under s.21 exempt – Whether principle of fiscal neutrality infringed – Same company making supplies to same players under both section 14 and 21 – Whether infringement of fiscal neutrality requires competition between supplies as well as different treatment of similar supplies – Linneweber [2005] ECR I-1131 applied – EC 6th Directive (77/388/EEC) Art 13B(f) – VATA 1994 Sch 9, Grp 4, Item 1 Note (4) – Appeal allowed in principle

LONDON TRIBUNAL CENTRE

THE RANK GROUP PLC Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: THEODORE WALLACE (Chairman)

A J RING FCA, FTII

Sitting in public in London on 25 April 2008

Dr Paul Lasok QC and Valentina Sloane, instructed by Deloitte & Touche LLP, for the Appellant

Christopher Vadja QC and George Peretz, instructed by the Solicitor for the Respondents

© CROWN COPYRIGHT 2008

DECISION

This decision concerns the compatibility under Community Law of the exclusion from exemption of supplies by the Appellant of the right to take part in mechanised cash bingo which fell within section 14 of the Gaming Act 1968. It concerns Schedule 9, Group 4 of the VAT Act 1994 as it was before amendment by the VAT (Betting, Gaming and Lotteries) Order 2005.

The actual subject matter of the appeal is the refusal of a repayment claim of £36,313,328 for the accounting periods from January 2003 to December 2005. The supplies were made by Mecca Bingo Ltd, part of the VAT group of which the Appellant is the representative member.

Put shortly the Appellant contended that the treatment of its MCB failed to comply with the principle of fiscal neutrality since the same game was taxable when falling under section 14 of the Gaming Act but was exempt when falling under section 21 and that in accordance with Finanzamt Gladbeck v Linneweber (Case C-452/02) [2005] ECR 1-1131 the exclusion from exemption fall to be disapplied.

There was an agreed statement of facts as follows:

(1) For the period in dispute (1 January 2003 to 31 December 2005), mechanised cash bingo ("MCB") was played pursuant to either section 14 or section 21 of the Gaming Act 1968 ("the Gaming Act"). The brand names for MCB played at Rank bingo clubs were "Cashline", "Prizeline" and "Prize for Cash".

(2) If a bingo game had a stake of 50p or less and the cash prize offered was £25 or less, then the game was played under section 21 of the Gaming Act as amended. The Rank brand name for this type of game was "Prize for Cash".

(3) If a non-cash prize was offered, the maximum stake for such a game was 50p and the value of the non-monetary prize no more than £500, then that type of bingo was also played under section 21 of the Gaming Act as amended. The Rank brand name for this type of game was "Prizeline".

(4) If a game had a stake greater than 50p or if the cash prize was more than £25, then the game was being played under section 14 of the Gaming Act. The Rank brand name for this type of game was "Cashline". Charges could be made and were made for such a game by virtue of regulations made under section 14 of the Gaming Act. At the material times, those regulations were the Gaming Clubs (Hours and Charges) Regulations 1984, as amended. Those charges were displayed in all bingo clubs on their Charges to Play notice.

(5) For the period in dispute, the provision of any facilities for the placing of bets or the playing of any games of chance was exempt from VAT pursuant to item 1 of Group 4, Schedule 9 to the Value Added Tax Act 1994 ("VATA"). However, Note (1) to Group 4 provided that item 1 did not include "the granting of a right to take part in a game in respect of which a charge may be made by virtue of regulations under section 14 of the Gaming Act 1968….".

(6) Accordingly, for the period in dispute, games played under section 21 of the Gaming Act (Prize for Cash and Prizeline) were exempt from VAT, whereas games falling outside section 21 but played under section 14 of the Gaming Act (Cashline) were taxable pursuant to the exclusion from item 1 of Group 4, Schedule 9 to VATA by virtue of Note (1) to that item.

(7) For mainstage bingo (also known as "ticket" or "book" bingo), which provided the context for games of MCB before playing mainstage bingo, a player purchased a book of bingo tickets. The number of books a player purchased depended on how many tickets or chances the player wanted in each game. Games of bingo were grouped into "sessions." For each bingo session, a player needed to purchase one or more bingo books which covered games played within that session. Each book included a number of different coloured pages and each coloured page related to a different game. Each ticket contained a grid of fifteen selected numbers between one and ninety. The numbers were arranged on the ticket in columns i.e. the first column was single numbers, then tens, twenties and so on across the page. Not all mainstage bingo was played on paper; it could be played electronically on a terminal.

(8) A mainstage bingo session was presided over by a caller. Before starting any game in the session, the caller would announce the prize for the game and what was being played for i.e. either a line across, two lines across or a full house. The caller would announce each number in turn and players used a marker pen "dabber" to cross off the numbers called during the game. If a player believed that he or she had marked all the numbers required for a line or a full house, the player would shout to stop the game. The caller would then announce if the claim was correct. A valid claim would result in the prize being awarded.

(9) The Bingo Association Code of Conduct provided that MCB could not be a substitute for mainstage bingo. MCB was a game that should only be played either before or after the main game(s) of mainstage bingo or during an interval between such games.

(10) Unlike mainstage bingo, MCB was not played with books; games were played on either a portable bingo board or from a board built into the players' tables located within the designated licensed area of the bingo club. Gameboards could either be single or dual type boards. The gameboards were 4x4 square split up into four colour coded columns. The first column (red) contained a selection of numbers from 1 to 20; the second column (yellow) contained numbers from 21 to 40; the third column (blue) contained numbers from 41 to 60 and the fourth column (white) contained numbers from 61 to 80. An interval game might be played at some stage during a session of mainstage bingo. At the start of an interval game, a caller would announce that "cash bingo" was going to be played and that for a sum of (for example) £1, a member would be able to play a number of games of bingo. The caller would also announce that the first block of cash bingo would constitute a certain number of games, for various stakes that would add up to (say) £1. A "block" was the basic unit of MCB. A block would consist of a least one and no more than ten games of bingo.

(11) Players had a period of, typically, 30 seconds or less to put their stake into the coin slot before the game began. Once the player had put his or her stake into the coin slot, the bingo card embedded in the table became illuminated demonstrating that the player sitting at that position had credit to play the next game. A player, at the time of putting their stake into the coin slot would know the stake per game but would not necessarily know the prize for any of the games within a block. For example, players might have been told that £1 would purchase the next (say) four 25p games.

(12) The stake per game within a £1 block could range from £0.10p to £1. For example, it was possible that within a block a player would pay 40p to play a game that would turn out to be exempt from VAT because the prize was less than £25, yet the next game within the block, also for 40p, would turn out to be subject to VAT, because more players had joined the game and pushed the prize above the £25 threshold. That was because a player who put money into the slot after the second number was called was able to play the next game (within the same block), but not the game currently being played. Therefore, it was possible that (during the period relevant to the appeal) games falling within both section 21 and section 14 of the Gaming Act 1968 would be played.

(13) The prize would increase when more players joined because the prize was calculated by taking the number of players in the game when the second number was called and multiplying by the price of the game less the participation fee. Therefore, the calculated prize increased as more players joined and correspondingly decreased as players ran out of credit and left the game.

(14) As players were able to join a game up to two calls into the game, a game could switch from a section 21 to a section 14 game during the first two calls. A player would be unaware when the game switched from being a section 21 game to a section 14 game.

(15) Once players had entered their stakes, the caller would announce the approximate quantum of the prize at that time. (However, as players were able to join a game up to two calls into a game, the quantum of the prize could change up until the end of the second call at which time the exact price was displayed. The more players who decided to participate, the higher the prize money. Only upon the conclusion of the game would the exact prize be announced.) The caller would then start calling numbers. The caller would announce each number in turn, together with the colour under which the number sat i.e. yellow 29. Players used plastic counters to cover off numbers called during a game.

(16) If a player believed that he or she had a winning bingo card, the player would press the claim button on the table. The caller would then announce if the claim was correct. A valid claim would result in the prize being awarded and the start of the next game within that block. Every game would have a valid card prior to its conclusion, however players might mistakenly claim believing that they had a valid claim or might call late having missed a valid claim by virtue of the next number being called.

(17) With MCB, a player could play for any of a line diagonally, across or down, the four centre squares, the four corners or the full board. The caller would announce which of these were being played for at the start of the game.

(18) All games within a block were called "cash games" by the caller, unless a non- monetary prize was offered, regardless of whether it was being played under section 14 or section 21 of the Gaming Act 1968. As a general rule, the clubs preferred playing cash games because there was a good chance that players would "re-cycle" their winnings by staking them within the club.

Submissions

Dr Lasok, for the Appellant, said that it was agreed that a game could move from being an exempt section 21 game to being a taxable section 14 game during the course of a game without the players' knowledge and that objectively there was no real difference between section 14 and section 21 games which were identical as far as the consumer was concerned.

He submitted that the taxation of section 14 bingo was arbitrary and inconsistent with fiscal neutrality and therefore unlawful so that the entire class of MCB reverted to being exempt under Article 13B(f) of the Sixth Direction following Linneweber. The difference in treatment was arbitrary and no justification had been offered.

He said that Customs contended that the two types of bingo although identical to the consumer were not in "a situation of competition in which the difference in tax treatment could be relevant", citing European Commission v France (Case C-481/98) [2001] ECR I – 3369 at [27]; we refer to that case as "the French drugs case". He said that there is no authority for the proposition that fiscal neutrality is breached only where a difference in VAT treatment affects the consumer's decision as to which product to take.

Dr Lasok said that a similar argument had been advanced by the United Kingdom in J P Morgan Fleming Claverhouse Investment Trust plc and AITC v Revenue and Customs Commissioners (Case C-363/05) ("the AITC case) where there was no evidence that the decision of consumers was affected by the difference in VAT treatment. The Advocate General rejected the UK submission that the difference in tax treatment had no effect on the competitive relationship because the extra tax borne by investment trust companies was too small, saying at paragraph 43 that breach of fiscal neutrality "does not require the unequal taxation actually to result in a demonstrable distortion of competition." At [47] the Court of Justice said "distortion is established once it is found that supplies of services are in competition and treated unfairly for the purposes of VAT." The Court went on to say, "It is irrelevant in that connect whether the distortion is substantial."

He said that in the French drugs case the Court at [25] assimilated similarity of products with being in competition using phraseology going back to the First Directive. The question addressed at [25] and following was whether the medicinal products were similar. In that case there were non-VAT reasons why the two types of product were not substitutable for each other in the eyes of the consumer.

Dr Lasok said that no such argument had been advanced in the present case. It had not been suggested that there was some objective non-VAT reason why consumers would prefer one type of MCB to another.

He said that in no case where a breach of fiscal neutrality has been found by the Court of Justice has there been a situation where the decision of the consumer was affected by the difference in VAT treatment. The French drugs case was a case on similarity where the groups of products were objectively distinct. In the present case the two forms of bingo were objectively identical.

Mr Vadja, for Customs, said that this was a simple case which had absolutely nothing to do with "competition" in any sensible use of that expression. Put broadly, the principle of fiscal neutrality is that trader A should not be paying VAT if trader B who is competing with him in relation to the same goods has an exemption. Neutrality of competition is part of equal treatment : if there are two competing taxpayers, they should have the same VAT treatment. In Linneweber the trader offered similar games to those offered in a licenced public casino and should be treated fairly. In AITC those selling investment trusts should be treated fairly compared with those marketing open-ended unit trusts. Fiscal neutrality is the application of fairness to taxation; fairness focuses on avoiding distortion of competition. Normally where similar goods are offered by taxable persons they are in competition with each other.

He said that in the present case the player could not tell the difference between whether a game was section 14 or 21. This was not a case about distortion of competition. The statement of facts only dealt with the Appellant not with other establishments. Although in most cases it was possible to conclude that once there is similarity between products, a difference in treatment leads to distortion of competition, it would be wholly artificial to suggest that in the present case. Here on the facts although there was a difference in treatment of similar supplies, there was no distortion of competition.

Mr Vadja said that the French drugs case was not factually analogous but did illustrate that a difference in treatment between products which are intrinsically similar does not automatically lead to a finding of distortion of competition.

He distinguished AITC on the basis that there were competing traders so that there was no need for evidence to show actual distortion of competition. The fact that in AITC the court only referred to [22] in the French drugs case did not mean that the rest of that case is not still good law, although the French drugs case has not been considered in any other case.

In reply Dr Lasok said that in the French drugs case there was no similarity in the way in which the products served the needs of the consumer. There had been no cases where there was similarity but where a further stage requiring competition had been inserted before a conclusion that there was a breach of fiscal neutrality. In AITC there was similarity of products but no evidence of distortion of competition.

He said that all the formulations of the principle of fiscal neutrality refer to the equal tax treatment of similar products or supplies, this was what the First Directive referred to. Customs approach however was in terms of competition between traders. It is through the difference of treatment of similar supplies that traders might be affected in their competitive position. The principle however is concerned with the treatment of similar supplies.

He said that the logic of Customs' argument was that although if trader A offered section 14 bingo and trader B offered section 21 bingo they must be treated in the same way for VAT, the same did not apply if the same trader provided both products because he was not in competition with himself. If an appeal was bought by trader A, Customs would have no defence. He characterised it as weird if the Appellant failed because it was providing both games. Further, he asked where was the legal certainty?

Conclusions

At the relevant time Note 1(b) to Schedule 9, Group 4 of the 1994 Act excluded from the exemption under item 1 of the provision of any facilities for the playing of any game of chance "the granting of a right to take part in a game in respect of which a charge may be made by virtue of regulation under section 14 of the Gaming Act 1968." It was established in Linneweber [2003] ECR I-12691 that, when laying down limitations to the exemption under Article 13B(f) of the Sixth Directive for gambling, Member States must comply with the principle of fiscal neutrality which precludes different treatment of similar supplies.

Although not formally part of the agreed facts, Mr Vadja accepted that games of MCB under section 14 and 21 were identical from the point of view of the consumer and that there was similarity between the supplies but different tax treatment.

The dispute between counsel was solely whether it followed from the different treatment of similar products that there was a lack of fiscal neutrality. Mr Vadja submitted that the difference in VAT treatment must be relevant to a situation of competition between the products by favouring the sale of one product over another and that in the present case the difference of VAT treatment did not favour section 21 games of MCB because it had and could have no effect at the time when the consumer made his choice on any characteristic of MCB with which the consumer might be concerned, see paragraph 18 of his skeleton argument. Dr Lasok submitted that differential VAT treatment of similar supplies was in itself contrary to fiscal neutrality without more.

European Commission v France [2001] ECR I-3369 concerned infraction proceedings arising out of the levying of a higher rate of VAT on drugs which were not reimbursable under the French Social Security Code than on drugs which were reimbursable. The Court decided at [25] that in maintaining a lower rate of VAT solely for reimbursable products the legislation did not infringe the principle of fiscal neutrality stating, "Reimbursable and non-reimbursable medicinal products are not similar products in competition with one another." At [27] the Court said that the effect of the different classification for reimbursement was that the reimbursable product had a decisive advantage for the final consumer which consequently provided the reason for his decision to purchase rather than the lower rate of VAT. The Court then said, "The two categories of medicinal products are thus not in a situation of competition in which the difference in the rates of VAT could be relevant."

In that case, therefore, the Court concluded that there was no breach of fiscal neutrality because the products were not similar since the difference in reimbursement had the effect that the products were not in competition.

European Commission v Germany [2003] ECR I-12691 concerned differential treatment for VAT of musical ensembles and soloists provided the latter organised the concert themselves. The Court said at [20] that the principle of fiscal neutrality precluded "treating similar goods and supplies of services, which are thus in competition with each other, differently for VAT purposes." The decision made no reference to any actual evidence of competition.

In Linneweber the Court cited the above passage from [20] in EC v Germany. At [28] the Court said that the identity of the operator was not relevant when considering whether two games must be considered to be in competition with one another. There was no reference to any evidence of competition between the Appellant and the casino; it was taken for granted.

The AITC case, which is not yet reported, concerned the charge to VAT on management services provided to investment trusts as opposed to unit trusts. The order for Reference from this Tribunal showed that the charges were 0.6 per cent of the funds' net assets : VAT was therefore 0.105 per cent. The UK submitted that the difference in tax treatment had no effect on competition because it was too small. The Advocate General said at paragraph 43,

"That cannot be accepted. The principle of fiscal neutrality precludes unequal treatment of similar and therefore competing goods or services as regards exemption from VAT. Breach of that principle does not require the unequal taxation actually to result in a demonstrable distortion of competition. Otherwise exemption would apply on a case-by-case basis."

At [46] and [47] the Court said this

"46… The principle of fiscal neutrality … precludes economic operators carrying out the same transactions from being treated differently in relation to the levying of VAT. That principle does not require the transactions to be identical. According to settled case-law that principle precludes, in particular, treating similar goods and supplies of services, which are thus in competition with each other, differently for VAT purposes (see Commission v Germany [2003] ECR I–12691, [20], Linneweber [2005] ECR I-1131, [24] …)"

"47. The principle of fiscal neutrality includes the principle of elimination of distortion in competition as a result of differing treatment for VAT purposes (see, to that effect, Commission v France [2001] ECR I-3369, [22]). Therefore, distortion is established once it is found that supplies of services are in competition and are treated unequally for the purposes of VAT (see, to that effect, Commission v France [2001] ECR I-2667, [45] to [47]). It is irrelevant, in that connection, whether the distortion is substantial."

The words "which are thus in competition with each other" in [46] and the words in paragraph 43 of the Advocate General's opinion "and therefore competing goods or services" support the submission of Dr Lasok that once goods or services are similar it follows that they are in competition.

The reasoning of the Court in the French drugs case is not easy to follow, however we accept the submission of Dr Lasok that the references to the products being in competition were directed at the issue of whether they were similar products for the purposes of fiscal neutrality.

If there is a separate requirement that a situation of competition must be shown in addition to similarity of products or supplies, that would necessarily have been addressed by the Court in the AITC case. The UK specifically referred in its submissions to how small the VAT element on management charges was and it was apparent from the Order for Reference that it was only marginally above one-tenth of 1 per cent. It was no part of Mr Vadja's submission that the section 14 and section 21 games were not similar because the difference did not affect the consumer's choice.

Mr Vadja's submission as to the lack of evidence of competition focussed on the fact that the supplies covered by the agreed facts were all supplies by the Appellant which was not competing with itself. That approach however involves addressing the question of distortion of competition on a case-by-case basis, an approach impliedly rejected by the Advocate General at paragraph 43 of AITC. As Dr Lasok pointed out it would result in the anomalous result that an appeal by a trader making both section 14 and section 21 supplies would fail whereas an appeal by a trader making section 14 supplies alone would succeed. In our judgment such a result cannot be correct and would be incompatible with Community Law. This appeal is concerned with the legislation itself and not with its application in particular cases. Either the provisions of Note 1(b) did infringe the principle of fiscal neutrality or they did not. This cannot depend on the circumstances of the individual Appellant.

The appeal is therefore allowed in principle. We direct the parties to notify the Tribunal within three months whether the figures are agreed and that any applications for costs or interest are made within a further three months.

THEODORE WALLACE

CHAIRMAN

RELEASED: 15 May 2008

Re-Release with corrections: 27 May 2008

LON/06/1243