As we are knee deep in 2016’s Summer of Sport, this month’s Chartered Accountants Tax Case Digest looks at a recent Court of Appeal decision on the VAT treatment of Spot the Ball competitions.

The Court of Appeal held that the entry fee for such games was payment for the facility to play a game of chance and, at the relevant time, the supplies were thus exempt from VAT. This was a unanimous decision.

The Court further held that a game does not require inter player participation/communication or some reaction to changed circumstances. A game includes a single player playing against the bank or playing on a gaming machine (though gaming machine takings were specifically excluded from the games of chance exemption at the relevant time).

Background

The principal issue on this appeal from the Upper Tribunal (“the UT”) was whether the First-tier Tribunal (“FTT”) were wrong to hold that IFX Investment Company Ltd’s (“the appellants”) “Spot the Ball” competitions (“STB”) were exempt under the gaming exemption in Group 4 of Schedule 9 to the Value Added Tax Act 1994 (“VATA”), and the statutory provisions which VATA replaced.

To fall within the gaming exemption, STB must be a “game of chance” within the meaning of the Gaming Act 1968 (“GA 68”). The dispute was therefore over the meaning of the words “game” and “chance”.

The FTT had rejected the argument that there had to be an “inter-player interaction rule”, i.e. a rule that a competitor has both to make a move and also to respond to another competitor’s move or to a change of circumstance resulting from his move. It also held that STB was a game of chance.

The UT found there to be an error of law on the basis that inter-player interaction was classically required, and that its own assessment was that STB was not a “game.” It did not therefore need to consider whether STB was a game “of chance.”

The appellants argued that the UT was wrong to require a degree of inter-player participation: there is no hard and fast rule about this. Therefore, there was no error of law entitling the UT to intervene.

The appellants are a group of operators of STB (or successors in title to or assignees of, operators of STB). The period under appeal was April 1979 to December 2006. STB was played by the operator producing a picture of a football game but with the ball, together sometimes with other features which might potentially assist in locating the ball, such as the facial expressions or orientation of spectators, blanked out. The competitor had to place a cross where he or she thought the ball was and return the coupon to the operator. There was no single set of rules applying to STB. A typical coupon would invite a participant to “use your skill and judgment to decide from all the information contained in the picture, the spot where you think the centre of the ball is most likely to be and indicate the spot by making a cross….”

The form of STB with which this appeal was concerned is called “panel STB”. Although participants are instructed to guess the actual location of the missing ball, the rules generally made it clear that the winner would be decided not by reference to the actual position of the ball on the original photograph, but by reference to the opinion of the panel of experts as to which entry was most “skillful” or was closest to the panel’s opinion of the most logical position of the ball. STB was presented to the public as involving skill and judgement and also involving elements of chance.

Decisions

The FTT decision

The FTT held that FTT was a game “of chance” for GA 68 purposes.

During most of the relevant period, the VAT exemption for gaming was contained successively in Group 4, Schedule 5, Finance Act 1972, Group 4, Schedule 6, Value Added Tax Act 1983 and Group 4, Schedule 9 Value Added Tax Act 1994, which provided exemption from VAT for:

“1. The provision of any facilities for the placing of bets or the playing of any games of chance.”

Until October 2006, the successive provisions all defined “game of chance” for these purposes as having the same meaning as in the GA 68. The relevant provisions of GA 68 were in section 52:

“(1) ….“game of chance” does not include any athletic game or sport, but, with that exception, and subject to subsection (6) of this section, includes a game of chance and skill combined and a pretended game of chance or of chance and skill combined;…

(6) In determining for the purposes of this Act whether a game, which is played otherwise than against one or more other players, is a game of chance and skill combined, the possibility of superlative skill eliminating the element of chance shall be disregarded.”

From November 2006, the definition of “game of chance” was moved into the Notes to Group 4 of Schedule 9 to the Value Added Tax Act 1994. The new definition extended the exclusion of superlative skill to all games of chance, and not just those played against an operator or against a machine.

The FTT rejected HMRC’s argument that a “game” required interaction between the players. The essence of the FTT’s approach was that in the absence of any real guidance in the case law they had to approach the “game” according to its ordinary meaning in the context of the GA 68.

At paragraph 97 of its decision, the FTT adopted the dictum of Lord Hailsham in News of the World Ltd v Friend (1973) that “in these cases the court will look at the realities of the offer and the competition and will not allow itself to be deceived, whether innocently or otherwise, by delusive appearances or descriptions.” The FTT did not therefore confine their attention to the contractual documentation.

The principal reasoning of the FTT is to be found in the following paragraph of its decision:

“Like many other words, the word “game” is a chameleon. It takes its colour from the context in which it is used. It has numerous “ordinary meanings”, as highlighted by the entry from the Shorter Oxford English Dictionary which was put before us. Ignoring for a moment meanings which relate to wild animals pursued with guns or rods, it can mean “amusement, fun, sport”, “amusement, diversion”, “a diversion in the nature of a contest, played according to rules, and decided by superior skill, strength or good fortune”.

We do not consider that an activity must involve more than one person in some kind of interaction before it can be a “game”. It is normal, for example, to refer to a “game of patience”, which activity involves only the player and a pack of cards. We discount as unduly artificial Mr. MacNab’s argument that this is because there is an element of “interaction” in such a game, namely an interaction between the player and the randomness of the cards.

In seeking to explore the boundaries of the concept of a “game”, we also considered “puzzles” (involving the application of skill or logic to arrive at a single correct solution, such as in a crossword puzzle or Sudoku), “pastimes” (involving activities of many kinds whose main purpose is to spend time pleasurably) and “competitions” (in which a participant pits himself against another participant or participants with the purpose of achieving victory). It became readily apparent that such consideration did more to illustrate the vagueness of the concept of “game” than it did to clarify it.”

In Oasis Technologies (UK) Limited v HMRC (2010), the FTT said (when considering the meaning of the word “game” for the purposes of determining whether a particular activity was a “game of chance” for the purposes of section 6 of the Gaming Act 2005):

“There is no definition of “game” in section 6, and so we must construe this term according to its ordinary meaning. There is no single meaning that can be attached to this term. According to the Shorter Oxford English Dictionary, it can variously be regarded as meaning an amusement, fun or sport, or as meaning a diversion, whether or not one in the nature of a contest played according to rules and decided by superior skill, strength or good fortune. We consider that this demonstrates that “game” has a wide meaning, to be construed according to its context”.

The Court of Appeal agreed with this analysis. In the light of the above, and adopting the approach of the First-tier Tribunal in Oasis, when considered in the context of section 52(1) GA 1968 or of Note (3) to Group 4, Schedule 9 to the Value Added Tax Act 1994, the Court considered it perfectly apt to refer to the activity of STB as a “game”.

On the issue of whether STB was a game of “chance”, the FTT held that, however skillful a competitor might be and even therefore if he had superlative skill, the most that skill and judgment could do was to estimate the balls approximate position and that accordingly the game was one of chance. The FTT noted that the Court of Appeal had held in R v Kelly (2009) that the element of chance did not have to be predominant. The FTT adopted another dictum of Lord Hailsham in News of the World Ltd v Friend that “the most that skill and judgment can do is to estimate its [i.e. the ball’s] approximate position.” This was also relevant to HMRC’s arguments. In these circumstances the gaming exemption applied and the operators’ appeals were allowed.

The UT decision

The UT held that “playing a “game” involved some sort of engagement with other players, and that accordingly the FTT erred in law by holding that STB, where this element is absent, could involve playing a game.

The UT held that the FTT had not paid sufficient attention to the authorities and that a “game” had certain essential elements. In particular playing a game involved among other things the player interacting with a changed circumstance or responding to another player’s interaction though this was not a universal rule:

The UT went on to say how in ordinary language this is how a game of chance is “played.”

In the judgment of the UT, STB is “played” in “solitary isolation” and does not involve any interaction between competitors. The only contract is between the operator and the individual competitor. Additionally the act of placing a cross on the coupon was not “playing”.

The UT held that the object of section 52(6) of the GA 68 was to bring within the scope of the terms ‘game of chance and skill combined’ games played against the bank or otherwise than against one or more players, as where gaming machines are used.

The Court of Appeal decision

The Court held that the inter-player interaction rule is not supported by authority. The three most important cases are the three bingo cases: Regional Pools, Adcock and Armstrong. None of these establishes that there cannot be a game unless there is inter-player interaction or that inter-player interaction must ordinarily exist. It all depends on the facts. The Court concluded from its study of the three bingo cases mentioned above that the FTT were correct to hold that there is no inter-player interaction rule. Adcock and Armstrong clearly contemplate that there can be a game without the contestants being in communication with each other. The words “it is necessary to show interaction between the competitors” are conspicuously absent from the judgments in both cases.

There is no requirement that the competitors must respond to each other’s moves. Games after all are about winning something either from the operator or other people. Here the prize is payable by the operator from its own assets, and so the fact that the competitor cannot identify other competitors does not matter to him. The identity of the other competitors only matters to the operator, to whom the competitor entrusts the task of determining the winner.

The Court therefore held that it follows that the FTT made no error of law on the question of what a “game” is unless it was in error of law on the section 52(6) point. However the Court held that the FTT’s reasoning on section 52(6) was literally correct and there was no error of law.

For the detailed reasons given above, the appeal was allowed and HMRC’s respondents notice was dismissed. The FTT made a finding that STB was a game of chance which could not be disturbed on appeal. There is no inter-player interaction rule or requirement for inter-player interaction in the ordinary case and the FTT’s reliance on section 52(6) did not amount to an error of law in the context of their decision read as a whole. The FTT found that STB was a game of chance and made no error of law in making that finding.

The UT itself committed an error of law in holding otherwise and thus the decision of the FTT was restored. In these circumstances the gaming exemption applied and the operators’ appeals were allowed.

The full judgment in this case is available from http://www.bailii.org/ew/cases/EWCA/Civ/2016/436.html