United Utilities Plc v Customs & Excise

The issue in this case is whether the exemption for betting and gambling contained in article 13B(f) of the EC Sixth Council Directive on VAT 77/388/EEC (referred to below as the Sixth Directive) also exempts the provision of services by agents of companies providing betting facilities. The appellant is the representative member of a VAT group.

The Tribunal found that a member of this group, which I shall call Vertex, was responsible for the activities of another company outside the group, which I shall call Littlewoods, in providing betting facilities. However, Vertex was not involved in the decision as to which bets to accept. The Tribunal concluded that as Vertex was not responsible for an essential part of the process of providing gambling facilities it was outside the exemption provided for by article 13B(f). The judge came to the same conclusion.

Article 13B provides:-

The Tribunal made detailed findings of fact. In short, Littlewoods employs Vertex as its agent in respect of a telephone betting service called Bet Direct. Vertex provides the premises, office and computer equipment and personnel and in addition a specialised computer service on which the game software, called Telebet, which was licensed to Littlewoods by a third party, can be run. The services were provided pursuant to an agreement dated 31 March 1999. The facts are set out in detail in the decision of the Tribunal and that of the judge. Put briefly, Littlewoods selects sporting and other events on which it is prepared to accept bets. Customers place their bets by telephone. Their calls are received by employees of Vertex who do not disclose that they are employees of Vertex. They accept the bet if the odds are quoted on Telebet. Otherwise they only accept the bet with the express permission of personnel of Littlewoods. Vertex handles no monies respecting Bet Direct. These monies are handled by Littlewoods. Vertex does not set the odds or appraise bets. That work is done by Littlewoods.

Before the Tribunal and before the judge, Vertex contended that Littlewoods had outsourced the functions of bookmaker. The Commissioners of Customs and Excise contended that Vertex provided no more than the services of a call centre. The Tribunal decided the matter in favour of the Commissioners. At paragraph 52 of the decision, the Tribunal (Mr D Demack) stated:-

The conclusion of the Tribunal is at paragraph 71 of its decision:-

The judge came to the same conclusion. He stated at paragraph 40 of his decision that he found that the proposition that Vertex accepted bets on behalf of Littlewoods:-

The judge concluded:-

After Vertex had opened its appeal in this court and made its submissions, the Commissioners accepted that, if agents were as a matter of Community law entitled to the benefit of the exemption conferred by Article 13B(f), the Tribunal and the judge were in error. Vertex is responsible for communicating the acceptance of a bet on behalf of Littlewoods. That is an essential aspect of the supply of betting services because it consummates the transaction. However, Mr Kenneth Parker QC, for the Commissioners (who did not appear below), submits that it is not clear as a matter of Community law whether agents are ever entitled to this exemption, and that, as the position under Community law is not acte clair, this court should refer the question of the entitlement of Vertex to claim the exemption to the European Court of Justice.

The rationale for the exemption was analysed by Advocate General Jacobs in H.J. Glawe Spiel v Finanzamt Hamburg-Barmbek-Uhlenhorst [1994] STC 543:-

Advocate General Jacobs continued by analysing the reasons why betting and gambling were unsuited to be subjected to VAT:

The opinion of Advocate General Jacobs draws on the explanatory memorandum issued with the Proposal for a Sixth Council Directive on the harmonization of Member States concerning turnover taxes (Supp 11/73). This states that the exemption then in draft Article 14B(k) for gaming and lotteries:-

The explanatory memorandum makes the general comment with respect to the exemptions in draft Article 14B that they:-

The rationale for the exemption was further reviewed by Advocate General Stix-Hackl in Town and County Factors Ltd v Customs and Excise Commissioners (Case C-498/99) [2002] STC 1263. She said that the service in that case was the organising of the competition and the provision of a chance of winning. The entry fee could not be split between the two services. There is a direct link between the service supplied and the entry fee as consideration. She continued:-

In the Glawe Spiel case, Advocate General Jacobs considered that it was possible to apply VAT to transactions involving gaming machines, such as those concerned in that case, only because they were specifically designed to provide the operator with a predictable return and the certainty for the operator was such that his takings could be regarded less as winnings than as a fee for his service consisting of the provision of the machine. Moreover, the amount of that fee could be easily determined since it corresponded to the money emptied from the cash box.

Both Advocates General stress the inherent unsuitability of applying ordinary VAT principles to betting owing to the very nature of betting transactions and the difficulties of subjecting them to traditional concepts of consideration, supply and so on. They both considered that the essence of gambling was the provision of the entire framework or organisation within which the very activity can take place. In betting this would require the control and assessment of bets and the setting of odds, without which the activity could not take place.

The judgments of the European Court of Justice in the Glawe Spiel case and the Town and County Factors case concern article 11 and throw no light on the question at issue in this case. In the Glawe Spiel case, the member state had opted to impose VAT on the use of gaming machines and so no question of the extent of the exemption in relation to agents arose. Likewise, in the Town & County Factors case, the United Kingdom had opted to tax the form of betting there in question, so that again no question of the extent of the exemption in relation to agents arose.

Mr David Goy QC appears for Vertex. He relies on section 47(3) of the Value Added Tax Act 1994 which is derived from article 6(4) of the Sixth Directive and provides:-

The Commissioners put forward several reasons why this subsection does not apply in the present case. The most important of those reasons, which is sufficient for my purpose, is that section 47(3) does not deal with the supply of services by an agent to his principal, which is the case here. It deals with a situation where a principal supplies services through an agent. That is not the present situation.

Mr Goy’s fundamental argument, however, is that transactions carried out by principals and agents should be treated consistently, that is, as I understand it, in the same way under each exemption. For this purpose he relies on four cases. The first is Sparekassernes Datacenter v Skatteministeriet (Case C-2/95) [1997] STC 932 (referred to below as the SDC case). This was concerned with Article 13B(d)(3) (set out above), and the provision of services by a data-handling centre. Vertex submits that the European Court of Justice did not decide this case on the basis of the specific terms of the exemption, particularly the word “negotiation”, but rather on the general principle that a service was exempt if the agent performed a specific and essential function of a service falling within the exemption. The European Court of Justice held that the contrary conclusion would improperly restrict the exemption. The second case on which Vertex relies is CSC Financial Services Ltd v Customs and Excise Commissioners (Case C-235/00) [2002] STC 57. This concerned the provision of call centre services to unit trust managers, and the application of Article 13B(d)(5) (set out above), which again makes no reference to agents. The European Court of Justice applied the same approach as in the SDC case. The European Court of Justice did not, however, make any observation as to the position of agents generally under Article 13B. The third case on which Vertex relies is Customs and Excise Commissioners v FDR Ltd [2000] STC 672, a decision of this court, in which it was held that FDR, which processed credit card transactions as the card issuers’ agent, was making exempt supplies. The fourth case on which Vertex relies is Customs and Excise Commissioners v Electronic Data Systems Ltd [2003] STC 688. In that case, this court, applying the decision of the European Court of Justice in the SDC case, concluded that an agent, who provided loan centre services to a bank, could qualify for the exemption under Article 13B(d)(3) notwithstanding that the payments it made were not payments of its own funds but rather the funds of the bank. This court did not seek any underlying rationale as to why the exemption should be available to an agent. It applied the test of whether the service performed the essential function of an exempt supply established in the SDC case, and in particular whether it involved a change in the legal and financial situation of the relevant parties. Mr Goy submits that this decision did not turn on the inclusion of the word “negotiation” in the exemption.

Vertex also relies on the reasoning of the European Court of Justice in Card Protection Plan v Customs and Excise Commissioners [1999] STC 270 ECJ; [2001] STC 174 HL. In this case the taxpayer, CPP, purchased a block insurance policy and provided its own customers with the service of ensuring that insurance was provided by the third party insurer. CPP thus did not itself undertake to provide insurance cover. However, the European Court of Justice held that the expression “insurance transactions” in the exemption in Article 13B(a) was broad enough in principle to include the provision of a third party’s insurance cover by a person who was not himself an insurer (judgment, paragraph 22). Article 13B(a) was not limited to a particular class of persons. The court did not rely on the explicit exemption in Article 13B(a) for “insurance agents”.

For his part, Mr Parker submits that the basis for the exemption in Article 13B(d) is different from that which underlies the exemption in Article 13B(f). On his submission, it is the perceived difficulty in calculating with precision the value added in a transaction involving financial services. The value added is often hidden in the interest margin and by the financial institution. Moreover, the exemption in Article 13B(3)(d) specifically includes the “negotiation” of the service. The authorities referred to by the appellant are distinguishable because they turn on different exemptions.

In the United Kingdom, Article 13B(f) has been implemented by the following provisions of schedule 9 to the Value Added Tax 1994:-

It is not suggested that the United Kingdom has imposed any limitation on the betting exemption relevant to this case. Accordingly, the court must construe item 1 above in accordance with Article 13B(f) of the Sixth Directive, notwithstanding that it is a provision of domestic law. Moreover, a provision of Community law is not to be construed in the same way as an English statute, but in accordance with the guidance on interpretation given by the European Court of Justice.

In Cilfit v Ministry of Health [1982] ECR 3415, the European Court of Justice gave the following guidance on the interpretation of community law:-

This court has not been taken to any other language version of the Sixth Directive. My own perusal of the French version suggests that there is no material difference between the version in French and that in English. This court has not been asked to consider any decisions of other courts in the European Union which have considered the exemption with which we are concerned, and I would be prepared to accept that it might be difficult to find such decisions, and that, if Counsel in this case were aware of any relevant authority, they would in accordance with their duty have brought it to our attention.

However, on the principle of purposive interpretation set out by the European Court of Justice, it is plain that the exemption in Article 13B(f) must be construed in accordance with its underlying rationale of this exemption in the Directive. I also bear in mind that it is well-established that exemptions in the Sixth Directive are to be construed narrowly. The rationale of the exemption in Article 13B(f) has been analysed by Advocate General Jacobs and Advocate General Stix-Hackl in the cases to which I have referred above. I accept the submission of Mr Parker that, on the basis of that analysis alone, there is no room for granting the exemption to a person in the position of Vertex which provides services which do not include the establishing of the odds. No part of the consideration for Vertex’s services is fixed by reference to the odds on the chance of winning. It is possible to give effect to the purpose of the exemption without extending it to agents.

I further accept Mr Parker’s argument that the fact that agents may be within other exemptions in Article 13B is not conclusive in Vertex’s favour. The underlying purpose of the exemption in Article 13B(f) may provide objective justification for treating agents differently under that exemption. Article 13B is clearly a list of miscellaneous exemptions, that is, a list of exemptions which for different reasons should be outside the scope of VAT. The passages from the opinion of Advocate General Jacobs in the Glawe Spiel case illustrate this point.

On the other hand, without the actions of Vertex in this case no betting transaction would result between the customer and Littlewoods. Accordingly Vertex performs an essential step in creating a legal relationship between the customer and Littlewoods. Its actions consummate the supply of betting services to the customer. It is correct that Vertex does not set the odds, but neither did for example the taxpayer rate the risk or dictate the terms of the insurance which it caused to be supplied in the Card Protection case. If the jurisprudence of the European Court of Justice under article 13B(d) is a reliable guide, it is also irrelevant that the customer does not know of Vertex's participation in the transction, that Vertex is not itself a bookmaker and that it is Littlewoods not the customer who pays for Vertex's services. If the jurisprudence under article 13B(d) does not apply, and the position is that to be entitled to the exemption Vertex must be responsible for the betting elements of the transaction, such as the setting of the odds, then this appeal must fail. But even the Commissioners do not contend that it is clear as a matter of Community law that that is the position. They merely submit that the position is uncertain or doubtful in view of the opinions of the Advocates General in the Glawe Spiel and Town and County Factors cases.

In those circumstances, the question arises whether this court should refer a question to the European Court of Justice for a ruling on the interpretation of the exemption. In my judgment, the application of the exemption in Article 13B(f) to an agent admits of doubt. The jurisprudence of the European Court of Justice described above does not plainly establish whether or not the exemption is available to agents in the position of Vertex. Indeed the European Court of Justice has yet to consider the position of agents in relation to the exemption. It has been prepared to hold that call centres are within other exemptions in article 13B. For these reasons, I for my part do not consider that the Community law applicable to this case is acte clair. Whether this court should make a reference is a question for the discretion of this court. However, it has been impressed on us by Vertex that very many commercial organisations are in the same position as Vertex. If the Commissioners’ argument is right, then the exemption may not benefit any betting agent. The Commissioners have for many years been in the practice of extending the exemption to them, but that is not necessarily a reason for seeking clarification. On the basis that the point is of importance, I consider that the sooner a ruling is obtained from the European Court of Justice the better. In those circumstances, I would accede to the application of the Commissioners that a question should be referred to the European Court of Justice to obtain a ruling from it whether the exemption in Article 13B(f) can extend to an agent whose actions consummate a betting transaction between a bookmaker and his customer or whether to be entitled to this exemption the agent must also be responsible for the control and assessment of the bet and the setting of the odds. If my Lords agree to that course, the question would be submitted by this court but counsel are requested to agree a draft of the form of question that they would wish the court to put.

I would dismiss this appeal. My reasons are very simple and can be stated briefly. Under Art. 13B(f):

Vertex provides essentially administrative services for Littlewoods’ betting business. The provision of purely administrative services is simply not a betting service. Vertex are not in the gambling business.

This conclusion is not undermined by the fact that Vertex actually “accept” the bet from the customer. Such an act is merely mechanistic – the operator “accepts” only according to criteria set by Littlewoods. Vertex have no decision or discretion in the matter. Although the point could be elaborated (for instance by reference to the explanatory memorandum issued with the proposal for the sixth Council Directive), there is no point in doing so. In my view the answer is plain – hence acte clair.

I would only add three things. First the cases relied upon by Mr Goy and set out in paragraphs 20 onwards of My Lady’s judgment do not establish any general principle that a person who provides merely administrative services to a provider of exempt transactions thereby gains exemption. Any such principle would be far-reaching – a matter for the Directive itself. Yet it seems to me that without such a principle, the appeal must fail.

I do not regard Card Protection Plan v CCE [1999] STC 270, referred to by My Lady, as relevant here. There the exemption was, in the language of Art. 13B of the Sixth Directive, for “insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents.” True it is that the ECJ did not expressly refer to the express extension of the provision to insurance agents and brokers. But it was there self-evident that there was such an extension and the real question was whether there was an insurance transaction procured by the taxpayer. Here there is no express extension to betting agents. Nor is there even any procurement of a betting transaction by Vertex. Their function is, as I say, purely mechanistic.

Secondly there is the question of the Commissioners’ past treatment of betting agents. Below the Judge manfully tried to square that treatment with his decision. Before us Mr Parker frankly accepted that that past treatment may have been wrong – at least where the agent performs no more than a purely administrative function. He may well be right. The consequences of such a past error are not before us, nor are we concerned with the cases to which it has been applied, which may, for all I know, at least in some instances, differ materially on the facts.

I respectfully agree with Lord Justice Jacob that the services provided by Vertex to Littlewoods are not exempt within the terms of Article 13B(f) of the Sixth Directive and Item 1 of Group 4 of Schedule 9 to the 1994 Act, the latter of which exempts:

The critical point, which I believe Lord Justice Jacob has in mind, is that expressly recognised by the Tribunal, in paragraph 71 of its decision, and the Judge, in paragraph 46 of his judgment. It is that the relevant services for Vertex’s liability to VAT are the administrative services that it provides to Littlewoods, not for the part of Littlewoods’ services to their customers that it provides in that same way as Littlewoods’ intermediary. In providing such services to Littlewoods, Vertex is not providing them with “any facilities for the placing of bets or the playing of any games of chance”.

Nor is it within the rationale for the exemption under Article 13B, expressed by Advocates General Jacobs and Stix-Hackle in Glawe Spiel and Town & County Factors respectively, of providing to gamblers the framework for their gambling activity, namely the provision of a chance to win. As the Tribunal and the Judge found, Vertex does not provide Littlewoods with facilities for them to place bets; Vertex provides them with administrative services in order that they may, in part through Vertex as their Agent, provide their customers with those facilities.

If further support is necessary for that analysis on the facts of this case, it may be helpful to look at the gambling exemption in the context of some of the other exemptions in Article 13B. In doing so, I acknowledge that, for the reasons given by Arden LJ, the court should be careful in drawing comparisons between the different subject matters and ways of framing the exemptions. As the European Court of Justice observed in the CPP case, at paragraph 15, they are “independent concepts of Community law whose purpose is to avoid divergence in the application of the VAT system from one member state to another”. However, it may be instructive to note that in some of the exemptions, when the Council intended to include parties other than principals in the transaction or supply of services in question, it said so.

First, Article 13B(a), which exempts “insurance and reinsurance transactions”, expressly includes “related services performed by insurance brokers and insurance agents”. The fact that the European Court of Justice in CPP seemingly did not feel the need to have recourse to that express inclusion of agents for the purpose of the exemption is more a reflection of the particular circumstances of the case in which the agent was effectively the principal, than the fact that the Court would not have had recourse to it under the second limb of agency if the facts had justified and necessitated it; see paragraphs 22 to 25 of the judgment and paragraphs 28 to 33 of the Advocate General’ opinion.

Second, in Article 13B (d) (3), (4) and (5), the exemptions apply to the relevant “transactions, including negotiation …”, thus clearly providing, among other things, for the services of agents in negotiating the transactions or putative transactions.

Such express provision for inclusion of agents in the exemption where it is intended, but not otherwise, is of a piece with Article 6.4 of the Sixth Directive, to which section 47(3) of the 1994 Act gives effect. It provides:

As Mr Parker submitted, and as Arden LJ has held, section 47(3) does not deal with the supply, as here, by an agent to his principal, which carries its own tax treatment and is entirely separate from the supply made by the principal through the agent. Behind that simple proposition lies a broader one, which Mr. Parker put first in his submissions on this aspect of the case. It is that section 47(3) merely enables, in order to preserve the integrity of the VAT system, a supply through an agent to be treated as both supplied to and by him. The effect of that is to deem what would have been a single supply, which is from principal to recipient, to be two simultaneous supplies, namely from principal to agent and from agent to recipient. But, as he emphasised, that assumes that the simultaneous supplies of the principal and agent are coextensive. Thus, section 47(3) only enables the Commissioners to treat as two supplies in this context where a betting agent acts in his own name, effectively provides all the relevant betting facilities to the gambling customer and transacts the bets and receives the stakes for the account of his principal. But, as Arden LJ has noted in paragraph 4 of her judgment, that is not this case.

Accordingly, I would not make a reference of the question to the European Court of Justice, but would dismiss the appeal.