[2010] UKFTT 383 (TC)
TC00665
Appeal number: LON/2008/0628
VALUE ADDED TAX – Supplies – First issue whether single or separate – Alderney Company outsourcing to Appellant in UK – Held – No dominant element – College of Estate Management applied – Place of supply – Whether UK or Alderney – Appeal dismissed as to first issue – Adjourned as to place of supply
FIRST-TIER TRIBUNAL
TAX CHAMBER
WAGERWORKS UK LTDAppellant
- and -
THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMS (Value Added Tax) Respondents
TRIBUNAL: MISS J C GORT (Judge)
JOHN BROWN CBE, FCA, CTA
Sitting in public in London on 18-19 February 2009 and 21 June 2010
Mr Paul Key of counsel, instructed by Baker and MacKenzie LLP, for the Appellant
Mr Richard Smith of counsel, for the Respondents
© CROWN COPYRIGHT 2010
1
DECISION ON A PRELIMINARY POINT
1.This is an appeal against a decision of Her Majesty’s Revenue and Customs (“the Commissioners”) notified by letter dated 25 October 2007 and confirmed and upheld after review in a letter dated 25 February 2008. That decision was that services provided by WagerWorks UK Ltd (“WagerWorks”) to an associated company, WagerWorks Alderney Ltd (“WWA”) and its subsidiaries under the terms of its Services Agreement dated 1 September 2003 constitute a single supply of services for the purposes of VAT which are deemed to be supplied in the UK. The period to which the decision relates is 1 April 2006 to 30 September 2007.
2.The appeal was heard initially on 18 and 19 February 2009. The issues between the parties at the time of the original hearing were:
(i)Do the services supplied by WagerWorks to WWA constitute a single supply for VAT purposes or a number of separate supplies?
(ii)If a single supply, is that supply deemed to be made in the UK or in Alderney?
(iii)If multiple supplies, are they deemed to be made in the UK or in Alderney?
(iv)If multiple supplies, are some deemed to be made in the UK, and other in Alderney by reason of the relevant EU Directive (see below)?
3.Evidence given at that hearing caused the Tribunal to question whether it could properly be said that WWA had a business establishment or some other fixed establishment in Alderney, a matter which at that time had not been challenged by the Commissioners. It was WagerWorks’ principal case that during the relevant period it was making supplies in Alderney which is outside the UK and therefore, pursuant to the place of supply rules in Article 56 of Council Directive 2006/112/EC (formerly Article 9(2) of the Sixth VAT Directive) not subject to UK VAT.
4.At the conclusion of the hearing on 19 February 2009 we adjourned the matter for seven days for the Commissioners to notify us as to whether they contested WagerWorks’ assertion that WWA and its subsidiaries were at the relevant time established in Alderney. By a letter dated 26 February 2009 the Commissioners informed us that they required WagerWorks to prove its case in this regard and that there was insufficient evidence before the Tribunal for the Commissioners to concede the point. For reasons which it is unnecessary to set down here, the matter did not come before us again until 21 June 2010. At this hearing neither party was prepared to address us on the issue of establishment and both asked us to decide on the correct classification of the supplies made and to postpone any hearing on establishment until a later date. In the event, with a degree of reluctance, we decided to accede to that request. This is therefore a decision limited to issue (i) and to a consideration whether, should we decide that there are multiple supplies, all or any of those supplies come within the provisions of the relevant EU Directive.
The background
5.WagerWorks is a limited company incorporated in England. It was registered for VAT with effect from 5 December 2003. WagerWorks and WWA (a British Channel Island limited company) and its subsidiaries are wholly-owned subsidiaries of WagerWorks Inc. (“WW Inc”) a US company which itself is a wholly-owned subsidiary of INT. Game Technology Inc. WWA and its subsidiaries are licensed by the ChannelIsland authorities to operate internet gaming. WWA has sub-contracted to WagerWorks the provision of certain services to WWA.
6.WagerWorks had been paying value added tax on its supplies from its inception but disputed its liability to do so. The Commissioners by a letter of 3 January 2006 informed WagerWorks that they did not accept that the services WagerWorks provided could properly be broken down into the four elements – Customer Support, Accounting Legal and Record-Keeping, Compliance and Banking– as in the Services Agreement (see below) to which they had been referred by accountants acting on behalf of WagerWorks. The Commissioners decided that WagerWorks were providing a single supply of back office services. In correspondence following this letter, it was said by the accountants that the Services Agreement did not reflect the services actually provided by WagerWorks and that there were four distinct and separate departments within WagerWorks as follows: Customer Services and Poker Rooms; Website Production; Account Management; and Finance and Accounting. The Commissioners maintained their position that a single supply of services was deemed to be supplied in the United Kingdom. WagerWorks’accountants wrote again submitting that the services should be deemed to be supplied in Alderney and that the nature of the supply had again changed. There were now said to be six departments as follows: Customer Services; Finance and Accounting; Sales and Marketing; Account Management; UK Web Producer; and Network Operations Centre. The Commissioners did not alter their position and issued the decision letter of 25 October 2007.
The legislation
7.The general rule as to the place of supply of services is provided in Article 43 of the principal VAT Directive (2006/112/BC):
“The place of supply of services shall be deemed to be the place where the supplier has established his business or has a fixed establishment from which the service is supplied, or, in the absence of such a place of business or fixed establishment, the place where he has his permanent address or usually resides.”
This is enacted in domestic legislation in section 7(10) of the Act:
“A supply of services shall be treated as made –
(a)in the United Kingdom if the supplier belongs in the United Kingdom; and
(b)in another country (and not in the United Kingdom) if the supplier belongs in that country.”
Section 9(2) of the Act defines where a supplier of services belongs:
“The supplier of services shall be treated in belonging in a country if –
(a)he has there a business establishment or some other fixed establishment and no such establishment elsewhere, or
(b)he has no such establishment (there or elsewhere) by his usual place of residence is there; or
(c)he has such establishments both in that country and elsewhere and the establishment of his which is most directly concerned with the supply is there.”
An exception to the general rule is provided for in Article 56.1 of the Directive:
“The place of supply of the following services to customers established outside the community or to taxable persons established in the Community but not in the same country as the supplier, shall be the place where the customer has established his business or has a fixed establishment for which the service is supplied, or, in the absence of such a place, the place where he has his permanent address or usually resides;
…
(b)advertising services;
(c)the services of consultants, engineers, consultancy bureaux, lawyers, accountants and other similar services, as well as data processing and the provision of information;
…
(e)Banking, financial and insurance transactions, including re-insurance, with the exception of the hire of safes;
(f)the supply of staff;
…
(i)telecommunications services;
…
(k)electronically supplied services such as those referred to in Annex II
(l)the supply of services by intermediaries, acting in the name and on behalf of other persons, where those intermediaries take part in the supply of the services referred to in this paragraph.
2.Where the supplier of a service and the customer communicate via electronic mail, that shall not of itself mean that the service supplied is an electronically supplied service for the purposes of point (k) of paragraph 1.”
Annex II gives the following indicative list of electronically supplied services referred to above:
“(1)Website supply, web-hosting, distance maintenance of programmes and equipment;
(2)supply of software and updating thereof;
(3)supply of images, text and information and making available of databases;
(4)supply of music, films and games, including games of chance of gambling games, and of political, cultural, artistic, sporting, scientific and entertainment broadcasts and events;
(5)…”
The above is enacted into domestic legislation by Article 16 of the VAT (Place of Supply of Services) Order 1992 and Schedule 5 to the Act, which provide as follows:
Article 16
“Where a supply consists of any services of a description specified in any of paragraphs 1 to 8 of Schedule 5 to the Act, and the recipient of that supply –
(a)belongs in a country, other than the Isle of Man, which is not a MemberState;
…
It shall be treated as made where the recipient belongs.”
Schedule 5
2.Advertising Services
3.Services of consultants, engineers, consultancy bureaux, lawyers, accountants and other similar services; data processing and provision of information (but excluding from this head any services relating to land)
…
7C. Electronically supplied services, for example –
(a)website supply, web-hosting and distance maintenance of programmes and equipment;
(b)the supply of software and the updating of software;
…”
The evidence
8.An agreed bundle of documents was provided and we heard oral evidence from Mr Paul Mathews, president of WW Inc. and principal director of WagerWorks, on behalf of WagerWorks. In relation to the issue of single or multiple supplies only we find the following facts.
9.WW Inc develops and licences online casinos software and games and also oversees and provides strategic management to WagerWorks and WWA. There are seven subsidiaries of WWA who each provide online gaming solutions and utilise the casino software and online games developed by WW Inc. WWA was incorporated on 16 November 2001 in Alderney. A company called WagerWorks Alderney Holdings Ltd (“WWAH”) was incorporated on 6 November 2006 and appears to have acted as the umbrella company in Alderney from that date, although we were given no specific evidence to that effect. The various subsidiaries were incorporated on different dates between 3 October 2003 and 25 August 2006.
10.At the relevant time online gaming was illegal in the United States of America. Whilst the creation and provision of online gaming software was not prohibited there, it was illegal to host electronic games and to take bets and cash from players when provided from within the United States (“the US”). These activities were not illegal in Alderney where the regulatory authorities were very willing to provide online gaming licences. WWA was set up to hold the software and gaming licences and to provide online gaming services to end-user customers. The subsidiaries of WWA was set up because the Alderney authorities decided in July 2003 that a single legal entity could only hold one gaming licence, therefore each time WWA contracted with a new client it had to establish a separate legal entity. WWA described its business as offering ‘managed services’ to its customers who were major gaming companies such as Paddy Power plc and Virgin.com Ltd.
11.To operate its business WWA required an electronic infrastructure to support and provide online gaming, and for this over 100 servers were located in the Channel Islands. The servers are owned by WWA but WWA leases the site on which they are situated and they are maintained by subcontractors.
12.The contracts entered into by WWA entailed the client licensing its brand to the respective Alderney company so that the Alderney company could develop and operate an online gaming website that was specifically designed/branded for that particular client. In return for licensing the brand to the Alderney company, the client receives a revenue share based on the revenue generated by that particular online gaming website. In order to provide those services to its clients, the Alderney companies need to undertake or buy-in the following activities:
(a)write the software and create the games;
(b)host/manage the games and applications;
(c)access the hardware and maintain and develop the website and the operating systems;
(d)manage the customer service aspects of the business (except for Paddy Power);
(e)perform all the compliance and security functions associated with the business;
(f)hold the gaming licence on behalf of the client;
(g)deal with the regulatory authorities on behalf of the customer; and
(h)perform all the accounting and invoicing functions including cash/banking (except for Paddy Power).
Because of the lack of necessary personnel and expertise in the Channel Islands to carry out these functions, WagerWorks was set up in the UK to provide those which could not be provided by WW Inc. It is these services which are the subject of this appeal.
13.The Services Agreement between WWA and WagerWorks was executed on 1 September 2003 and was signed by Mr Mathews on behalf of WagerWorks as managing director. The recitals provide at Clause B that WagerWorks is licensed to provide certain fixed odds activities in the United Kingdom. Clause C provides that: “… WWAis managed and controlled from the US where the Board of Director resides permanently”. Clause D provides inter alia: “… WWA has and will have the need for specific services including customer support services, compliance, legal, banking, accounting and record-keeping and similar services (collectively known as ‘Services’) from time to time, but had determined that it is not cost effective to maintain all the infrastructure associated therewith. Clause E provides that WagerWorks: “has agreed to provide the Services at an agreed upon cost.” By Clause H WagerWorks is described as ‘an independent contractor’.
14.The services which are subject to this Agreement are listed under four broad headings in paragraph 6 above.
Section 1.1.1. lists Customer Services in the following way:
24-hour customer support services including managing calls and emails from players of interactive gaming licensees of WWA businesses. Complete services for the poker teacher for all interactive gaming licensees of WWA. Services include:
1.1.1.1 Monitoring hardware connectivity,
1.1.1.2 Answering calls,
1.1.1.3 Trouble-shooting player complaints,
1.1.1.4 Running financial reports,
1.1.1.5 Chat-room monitoring,
1.1.1.6 Collusion detection services,
1.1.1.7 And assisting in the maintenance of player accounts.
The chat room monitoring and collusion detection services were said by Mr Mathews to be performed in the US.
15.The Agreement continues as follows:
“Section 1.2.1. Compliance Services WW UK (WagerWorks) provides a Compliance Service that ensures WWA maintains a strict level of compliance with the rules and regulations of the Alderney Gambling Control Commission. Compliance Services include:
1.2.1.1 Reporting non-compliance ,
1.2.1.2 Reviewing data to detect suspicious activity on the WWA sites,
1.2.1.3 And maintaining the security of the sites.
Section 1.3…
Section 1.3.1. Banking Services WWA businesses maintain their bank accounts in the UK. WW UK (WagerWorks) provides support in connection with the banking services including:
1.3.1.1 Managing and overseeing the banking activities,
1.3.1.2 Reconciliation of all bank accounts to the activity of all sites operated by WWA,
1.3.1.3 And facilitating payment of invoices issued to the WWA businesses,
1.3.1.4 Arranging, authorising and processing customer credit card payments,
1.3.1.5 Services relating to the movement of cash with the business,
1.3.1.6 Financial advice necessary for the operations of the business.
Section 1.4…
Section 1.4.1 Accounting Services. WW UK (WagerWorks) shall provide WWA with Accounting Services. These Services include:
1.4.1.1 Managing and overseeing all accounting activities,
1.4.1.2 Maintenance of WWA’s accounts payable and accounts receivable records,
1.4.1.3 Preparation of unaudited monthly financial statements and other standard internal reports,
1.4.1.4 Managing and overseeing all financial audits,
1.4.1.5 Managing and overseeing all compliance audits for the Alderney Gaming Control Commission or similar regulatory agency or body,
1.4.1.6 Completing all required monthly compliance reporting,
1.4.1.7 And maintenance of WWA’s fixed asset and other records necessary to support the accounting and reporting for WWA.
16.There are subsidiary paragraphs relating to Legal Services and Corporate Record-Keeping Services. Under Article II Section 2.1 there is a Clause headed ‘Additional Services’ which obliges WagerWorks to provide or otherwise make available to WWA such services in addition to those described in Article 1 as are reasonably requested by WWA subject to the agreement and to financial consideration and other terms.
17.Article III sets out provisions relating to the reimbursement of expenses and payment of fees. These are broadly that WWA shall reimburse WagerWorks for any and all out-of-pocket expenses or costs incurred or paid by WagerWorks on behalf of WWA in the performance of any of its responsibilities under this Agreement. It provides that fees shall be determined as costs paid or incurred by WagerWorks plus a 10% service fee. Those fees are intended to reflect as far as reasonably possible the actual expenses and costs attributable to WagerWorks provision of such services. By Article IV charges and fees are payable monthly. The procedure adopted is that at the end of a month an invoice is raised in respect of the Alderney companies based upon the cash that flowed through that customer’s site that month compared to the total cash received from all the Alderney companies in aggregate. If one of the individual Alderney companies generates 30% of the total cash from the site that month, it will be invoiced for 30% of the cost plus the 10% mark up. The allocation of costs to each department does not affect the aggregate price charged to the Alderney companies, it is merely a mechanism for determining what proportion of the total charges relates to the different department and roughly accords to the value of the different services provided by WagerWorks.
18.We note that the reason given by Mr Mathews in his witness statement for setting up WagerWorks was that it would be (a) inefficient to procure the different services from different service providers and (b) at the time, with the exception of a completing business, there was no single business in the marketplace offering all the different services required by WWA. We note that Paddy Power, a customer of WWA, was initially fully managed by them but it then decided to take the customer services function in-house in April 2005. From that date Paddy Power collected gaming revenue, retained the share that relates to its licensed revenue and remitted the remaining amount to the relevant Alderney company.