The Advocate General representing the Commissioners of Her Majesty’s Revenue and Customs v K E Entertainments Ltd

For VAT purposes, the taxable element of a composite price must ordinarily be calculated by the single method that correctly reflects the relevant supply and commercial reality. A taxpayer cannot choose retrospectively between alternative methods merely to obtain the lowest liability.

Article 90 of the Principal VAT Directive and regulation 38 of the Value Added Tax Regulations 1995 apply when consideration actually received is reduced after a supply. A later reanalysis of unchanged receipts is not such a reduction. Overpaid VAT arising from an incorrect calculation must instead be reclaimed under section 80 of the Value Added Tax Act 1994, subject to its limitation period. Published HMRC guidance states HMRC’s interpretation of the law. It does not itself impose legal obligations or create a right to repayment.

The taxpayer operated bingo clubs in Scotland. Customers paid a single fee for the right to participate in a session comprising several games. The taxpayer formerly calculated VAT separately for each game, following HMRC guidance. In 2007 HMRC stated that taxable participation fees should instead be calculated by aggregating the fees and prizes for each session.

After receiving a time-limited refund under section 80 of the Value Added Tax Act 1994, the taxpayer sought to recover VAT paid in earlier years by making an adjustment under regulation 38 of the Value Added Tax Regulations 1995. The First-tier Tribunal allowed its appeal, and the Upper Tribunal dismissed HMRC’s appeal. The Inner House allowed HMRC’s further appeal in [2018] CSIH 78 and reinstated the assessment.

The central issues were whether both calculation methods were lawful, whether changing methods constituted a decrease in consideration, and whether HMRC’s 2007 business brief authorised an unlimited retrospective adjustment.

1. Appeal dismissed unanimously. Lord Leggatt delivered the judgment, with which Lord Reed, Lord Hodge, Lord Lloyd-Jones and Lord Sales agreed.

2. The session-by-session method was the only correct method on the agreed facts. A customer bought the right to participate in a bingo session, rather than separate rights to play individual games. After identifying that supply, calculating the taxable participation fee was a matter of arithmetic: the total cash prizes paid for the session were deducted from the total fees received. The game-by-game method contradicted the commercial reality of the transaction and produced excessive output tax.

3. Although apportionment can involve evaluative judgment, this does not generally give taxpayers a lawful choice among methods. A court or tribunal should ordinarily determine the correct method. Consistency is critical in taxation because alternative lawful calculations for identical taxpayers could offend equal treatment, distort competition and undermine VAT neutrality. Even if two methods had been lawful, changing to the more favourable method would not itself have created a right to recover the difference.

4. The excess VAT paid under the game-by-game method was tax that was not due. Recovery therefore fell within section 80 of the Value Added Tax Act 1994. Sections 80(4) and 80(7) barred recovery for the earlier periods because the statutory time limit had expired.

5. Article 90 of the Principal VAT Directive and regulation 38 of the Value Added Tax Regulations 1995 require an actual post-supply reduction in the consideration received, such as non-payment, a rebate or a refund. A retrospective change in accounting analysis does not alter the consideration received from customers. It is therefore not a decrease in consideration and cannot support an adjustment under regulation 38.

6. HMRC notices and business briefs express HMRC’s interpretation of the law. In the absence of statutory authority, they neither bind taxpayers nor direct how tax must be calculated, subject to the distinct doctrine of legitimate expectation. The 2007 business brief invited claims for incorrectly calculated VAT under section 80, subject to the statutory time limit. Its references to adjustments concerned correction of small errors under regulation 34 and did not invite adjustments under regulation 38.

1. United Kingdom Supreme Court: In [2020] UKSC 28, unanimously dismissed the taxpayer’s appeal and upheld the Inner House’s reinstatement of HMRC’s assessment.
2. Inner House of the Court of Session: In [2018] CSIH 78, reported at [2019] STC 368, allowed HMRC’s appeal, reinstated the VAT assessment and granted permission to appeal.
3. Upper Tribunal (Tax and Chancery Chamber): In a decision reported at [2017] STC 1895, refused HMRC’s appeal.
4. First-tier Tribunal (Tax Chamber): In [2016] UKFTT 508 (TC), allowed the taxpayer’s appeal against HMRC’s decision and assessment.