C-498/99

TOWN & COUNTY FACTORS

O P I N I O N OF ADVOCATE GENERAL STIX-HACKL delivered on 27 September 2001 1

I — Introductory remarks tax (VAT) in the United Kingdom as the representative member of a group of com- panies. That group also includes Vernons Games Ltd ('Vernons Games').

1. In the present case the VAT and Duties Tribunal, Manchester, refers to the Court the question of whether a game of chance constitutes a taxable transaction for the purposes of value added tax law, in par- ticular the Sixth Council Directive 77/388/EEC of 17 May 1977 on the har- 3. Vernons Games is involved in the monisation of the laws of the Member organisation of weekly 'Spot the Ball' States relating to turnover tax — Common competitions. In the period from June 1994 system of value added tax: uniform basis of to November 1995 ('the relevant period') assessment ('the Sixth Directive'), 2even if Vernons Games organised competitions of it is not based on a legally enforceable the kind described in points 4 to 8 below. transaction, and if so, how the taxable amount is to be calculated.

4. On the entry forms for each competition were printed (a) a copy of a photograph taken during a football match from which I I — Facts, main proceedings and ques- the ball had been blanked out, (b) the rules tions referred for a preliminary ruling of the competition, and (c) a list of the prizes. A competitor could mark up to 900 crosses on the photograph to indicate where, in his judgment, the centre of the football was most likely to be; the entry fee 2. Town and County Factors Ltd ('Town varied according to the number of crosses. & County') is registered for value added The competitor completed the entry form and sent it to Vernons Games with the appropriate entry fee. A panel of three 1 — Original language: German. retired professional footballers decided on 2 —OJ 1977 L 145, p. 1. the basis of the retouched photograph

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8. Although there was nothing in the rules a doubt whether a supply effected for or anywhere else to oblige Vernons Games consideration within the meaning of to pay or pay for the prizes out of the entry Article 2(1) of the Sixth Directive was fees or any other specific moneys, in prac- made by Vernons Games to each com- tice this was done — out of the entry petitor ('the Tolsma question'); fees — for every competition. Vernons Games did not, either under the terms or by the commercial reality of the trans- action, have to deal with the entry fees in any specific manner or otherwise than as its own funds.

(b) if there was such a supply, then, in the light of paragraphs 8 to 13 of the judgment in Case C-38/93 Glawe [1994] ECR I-1679, the taxable 9. By letter of 28 March 1995 the Com- amount under Article 11A(1)(a) of the missioners of Customs and Excise ruled Sixth Directive was the full amount of that Town & County was liable to account the entry fees received and not the for VAT on the full amount of the entry amount remaining after payment of or fees for the accounting periods contained in for the prizes ('the Glawe question'); the relevant period, and not, as it con- tended, on the amount of the entry fees less the amount or value of the prizes.

(c) the need for a reference to the Court on the Tolsma question was to be con- 10. Town & County challenged that rul- sidered at a further hearing. ing. In its decision of 27 August 1996 the VAT Tribunal held that:

(a) in the light of paragraph 14 of the 11. The decisions made after that further judgment of the Court of Justice in hearing on the need for a reference were Case C-16/93 Tolsma [1994] ECR appealed to the High Court of Justice, I-743 the 'binding in honour only' which held that the Tolsma and Glawe provision, by negativing the existence questions should be referred to the Court of a legal relationship between the and the case remitted to the tribunal to competitor and Vernons Games, raised make the reference.

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(c) some other and if so what amount?' Such transactions may include inter alia:

— assignments of intangible property whether or not it is the subject of a III — Legal background document establishing title,

13. Article 2 of the Sixth Directive reads:

— obligations to refrain from an act or to tolerate an act or situation,

(a) in respect of supplies of goods and services other than those referred to in (b), (c) and (d) below, everything which '"Supply of services" shall mean any trans- constitutes the consideration which has action which does not constitute a supply been or is to be obtained by the of goods within the meaning of Article 5. supplier from the purchaser, the cus-

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tomer or a third party for such supplies the concept of consideration in Articles 2 including subsidies directly linked to and 11 of the Sixth Directive is a concept of the price of such supplies'. Community law, and must therefore be applied uniformly throughout the Commu- nity. Moreover, according to the Opinion of Advocate General Jacobs in Glawe, the entire legal and factual setting must be 16. Article 13B reads, in part: considered, which in the present case means having regard to the structure of the competition, which is typical of games of chance.

'Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse:

18. Town & County considers that the agreements at issue, whose particularity is that they give rise to a debt 'binding in honour only', are not subject to VAT. As follows from the Tolsma judgment, for there to be a supply of services there must be a legal relationship between the provider of the service and the recipient pursuant to (f) betting, lotteries and other forms of which there is reciprocal performance. gambling, subject to conditions and limitations laid down by each Member State...'.

22. The United Kingdom Government states that if an agreement between two 25. The United Kingdom Government persons contains a 'binding in honour only' further submits that if, in accordance with clause, all that means is that the parties the Court's case-law, even illegal trans- have decided that their relationship is not actions, which in many legal systems are to be enforceable by the courts. It does not not legally enforceable, are subject to VAT mean, however, that there is no legal on the basis of the principle of fiscal relationship at all. neutrality, that must also be the case with a transaction such as the present one.

23. The present case differs from Tolsma in 26. Finally, application of the Sixth Direc- that the clause was agreed between the tive may not depend on legal enforceability organiser and the competitor when they for the further reason that enforceability of entered into the agreement on the basis of debts may vary from Member State to which a supply was made for consider- Member State, which would lead to unjus-

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tified disruption of uniform tax treatment honour only, and no consideration was in the Community. paid for a defined service.

31. The Commission also observes that the 27. In the United Kingdom Government's view taken by Town & County would have view, the first question should therefore be the result that in many Member States answered in the affirmative. various gambling transactions would fall outside the scope of VAT, without any need for an exception as provided for in Article 13B(f) of the Sixth Directive. In several Member States such transactions cannot be enforced in the courts.

36. In Tolsma the Court refined that con- clusion by holding that a supply is made 'for consideration' and so is taxable only 'if 34. Under Article 2(1) of the Sixth Direc- there is a legal relationship between the tive, 'the supply of goods or services provider of the service and the recipient effected for consideration within the terri- pursuant to which there is reciprocal per- tory of the country by a taxable person formance, the remuneration received by the acting as such' is subject to VAT. It is thus provider of the service constituting the characteristic of such a taxable transaction value actually given in return for the service that a supply of services or goods may be supplied to the recipient'. 7 attributed to a consideration in such a way that the supply is to be regarded as made 'for consideration'.

37. In the light of Article 2 of the directive and the case-law of the Court cited above, that criterion of 'legal relationship' is not to be understood in isolation as meaning a 35. On this point, the Court has held inter particular specific legal characteristic alia in the Aardappelenbewaarplaats, 4 which a transaction must display. The Apple and Pear 5 and Naturally Yours 'legal relationship' concerns rather the link between supply and consideration.

4 — Case 154/80 Coöperatieve Aardappelenbewaarplaats [1981] ECR 445, paragraph 12. 6 — Case 230/87 Naturally Yours Cosmetics [1988] ECR 6365, 5 — Case 102/86 Apple and Pear Development Council [1988] paragraph 11. ECR 1443, paragraph 12. 7 — Case C-16/93 Tolsma 11994] ECR I-743, paragraph 14.

38. Whether there is a 'legal relationship' purely voluntarily and in principle received in the Tolsma sense cannot depend, more- the service regardless of their 'consider- over, on the presence of specific legal ation'. 8 characteristics, in particular contractual or procedural ones, such as enforceability in legal proceedings. Since the conditions for the existence and content of legal relation- ships vary according to national legal 41. In contrast to the Tolsma case, in cases systems, that would also be incompatible such as that in the main proceedings there with the principle of fiscal neutrality and is indeed a type of agreement under which the objective of harmonisation of VAT. the entry fee is paid for the service provided Otherwise the inclusion of a 'binding in by the organiser of the competition. To be honour only' clause could open the way to able to take part in the competition, the tax evasion. competitor must accept the rules imposed by the organiser and undertake to comply with all the terms of the agreement, includ- ing the rules of the competition. Only if the contestant — on the one hand — submits the entry form under those conditions and pays the corresponding fee can he — on the other hand — take part in the compe- tition and be given a chance of winning a prize. 39. All that need be examined is whether the components of reciprocal performance are exchanged in the framework of agree- ments — even ones that are binding in honour only — from which it is apparent that there is a direct link between them. 42. Since the service and the payment are exchanged in the framework of agreements from which it is apparent that there is a direct link between them, so that they satisfy the 'for consideration' criterion in Article 2 of the Sixth Directive, there is in any case a 'legal relationship' in the sense of the Tolsma judgment. The exclusion of legal enforceability of the agreements by the 'binding in honour only' clause is thus not material. 40. In the Tolsma case there were no agreements of any kind whatever which might have created a link between service and payment sufficient for it to be possible to speak of a transaction 'for consideration' within the meaning of Article 2 of the Sixth 43. Finally, as the United Kingdom Gov- Directive: the 'provider of the service' (in ernment submits, it may be deduced from that case a street musician) admittedly received certain sums 'for' his service, but the 'recipients of the service' paid them 8 — Ibid., paragraph 17.

47. Town & County submits that the service it supplies to the competitors is limited to the organising of a competition, 45. The answer to the first question must and it merely provides the framework therefore be that under the Sixth Directive, within which the competition can take in particular Article 2(1), a transaction place. The transaction with the competitor which the parties agree to be 'binding in is to be regarded as 'betting' or 'gambling' honour only' (and therefore under national within the meaning of Article 13B(f) of the law cannot be enforced in the courts) may Sixth Directive, and must be exempt in in principle constitute a taxable transaction principle from the tax in application of that for the purposes of VAT. provision. The United Kingdom customs authorities evidently seek to tax these transactions not because they cannot be regarded as 'betting' or 'gambling' but because they rely on the discretion allowed to the Member States to tax certain trans- actions even though they would otherwise be exempt under Article 13B(f) of the Sixth Directive. V — The second question

46. The second question refers expressly only to the organising of a competition, but 48. Town & County further submits that the structure of the transaction — whether 9 — Case C-283/95 Fischer [1998] ECR I-3369. they are gambling transactions or at least

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transactions close thereto — must be 51. Town & County thus proposes, in taken into account in assessing the con- conclusion, that the answer to the second sideration. question should be that the taxable con- sideration it receives for the service — that is, organising the Spot the Ball competition for the competitors — corresponds to the amount of the entry fees paid by the competitors less the amount or value of the prizes paid out to the successful com- 49. In this connection, it refers to the factual similarity with the transactions petitors as part of the competition. considered in the Glawe 10 and Fischer cases.

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54. Nor is Fischer applicable to the game of can be drawn between the competition at chance at issue, since in this case the issue and games of chance (gaming payment of prizes — unlike in the game machines, roulette). concerned in that case — does not consist in refunding the stake (possibly increased by an amount corresponding to the odds for the bet) and bears no relation to the amount of the entry fees of the successful competitors. The organiser of the compe- tition may therefore be compared to any other provider of services who uses the 57. The Commission further refers to the consideration received for his services for Court's decisions in Naturally Yours Cos- financing his ongoing business. The fact metics and Boots, according to which the that the amount of the prizes paid out is consideration actually received by the sup- calculated on the basis of the expected plier constitutes the taxable amount. In a receipts does not distinguish the organiser case such as the present one, it is therefore of the competition from any other trader in necessary to ascertain what the service another line of business. supplied consists in and what proportion of the entry fee is the remuneration for that service.

58. The service provided by the organiser 55. In the United Kingdom Government's of the competition consists in the organi- opinion, the answer to the question is sation of the competition, the remuneration therefore that the taxable amount in respect for which is the amount he actually retains of the organisation of a competition — after deducting the prizes. That is the that is, a game of chance — such as in the amount with which he covers his operating present case is the sum of the entry fees costs and taxes and which leaves him a paid by each competitor. margin of profit.

63. By its second question the VAT and Duties Tribunal seeks essentially to know whether, in respect of a transaction such as that at issue in the main proceedings, the taxable amount under the Sixth Directive is to be calculated on the basis of the amount of the entry fees or of the entry fees less the 61. Finally, in the Commission's view, it prizes paid out, or in some other way. makes no difference whether the taxable amount is to be determined as a proportion of the total entry fees for a competition or pro rata in respect of each individual service supplied to each competitor. The fact that the precise amount of the con- sideration components of the entry fee 64. In the context of the first question, it cannot be determined at the time of pay- had to be considered, on the basis of ment does not prevent the transaction from Article 2 of the Sixth Directive, whether being treated as described for VAT pur- the transaction at issue falls within the

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scope of the Sixth Directive at all, that is, interrelated components a transaction such whether there is a supply for consideration as that at issue in the main proceedings is of any sort. composed of, and hence what amount is to be classified as the consideration for the supply.

65. How precisely the taxable amount is to 1. Games of chance in VAT law be assessed and what in detail is to be included must now be determined on the basis of Article 11A(1)(a) of the Sixth Directive. Under that provision, the taxable amount for supplies of goods and services is 'everything which constitutes the consider- ation which has been or is to be obtained 68. As Advocate General Jacobs already by the supplier from the purchaser, the concluded in his Opinion in Glawe 1 5and customer or a third party for such supplies'. the Court has also recently held, 16 gaming transactions generally do not lend them- selves easily to the application of VAT. That is no doubt why the Commission took the position, in its proposal for the Sixth Directive, that it would be better for games of chance and lotteries to be subject to a special tax. 17

70. The particular problems in applying VAT to games of chance, as opposed to other transactions, result from the nature of 73. In a game of chance, the actual shift of games of chance, which is not directed assets is ultimately determined by the real- primarily at the (final) consumption of isation of a chance. In economic terms, the goods or services for payment, to which shift operates with an intermediate 'pool of VAT attaches, but to the award of a prize assets' which contains an element of setting which is linked to the competitor's 'con- off (the losses of one player feed the sideration', his stake, via an element of winnings of another player). The concepts chance, namely the chance of winning. of tax law ('consideration', 'supply', and so on) are therefore transferable to gaming transactions only to a limited extent or only after a precise analysis of the structure of the game.

77. It must be noted to begin with that the 2. The decision in Glawe structure of a game of chance such as that at issue in the main proceedings differs in essential points from the structure of a game of chance with gaming machines such as in Glawe. 75. The appellant in the main proceedings and the Commission rely on the Court's judgment and the Advocate General's Opinion in Glawe 20 and take the view that the service supplied by the organiser consists solely in the organisation of the competition, and that only a proportion of the entry fees constitutes consideration for that service, namely the entry fees less that proportion which corresponds to the prizes paid out to the players. In the present case, 78. When the Court held in Glawe that the therefore, as with the gaming machines in consideration received by the organiser the Glawe case, the winnings paid out are consisted only of the stakes remaining after not to be included in the taxable amount. payment out of the winnings, it expressly referred to the fact that because of manda- tory statutory provisions the gaming machines were set in such a way that on average at least 60% of the stakes were paid out to the players as winnings. 21 In Glawe the obligation to pay out a specified proportion of the stakes was complied with 76. As regards the application of the by arranging the gaming machines tech- decision in Glawe to a game of chance nically in such a way that the proportion to such as that at issue in the main proceed- be used for paying out winnings was ings, however, caution seems indicated. collected in a separate compartment and paid out from there. 19 — Case C-86/99, cited in note 16, paragraph 30. 20 — Case C-38/93, cited in note 10, and Opinion of Advocate General Jacobs at p. I-1681 et seq. 21 — Case C-38/93, cited in note 10, paragraph 9.

84. In contrast, with a game of chance such 81. With the game of chance at issue, the as that in the main proceedings, no such problem of displacing the economic burden 'splitting' of the stakes takes place. No of tax cannot arise, since, according to the proportion of the entry fees is withheld tribunal's account of the facts, there is no 23 — Case C-38/93, cited in note 10, paragraph 8, referring to Case 238/87, cited in note 6, paragraph 16. 22 — Case C-317/94, cited in note 12, paragraph 19. 24 — See paragraphs 9 to 12.

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from the organiser, he actually receives the 88. What supplies make up a transaction entire sum and can dispose over it. Win- by a taxable person, that is, whether it is a nings may be paid out of those or other supply of services or goods and whether funds or in another way, namely in the there is a single service, is to be ascertained form of prizes in kind (goods or services). by taking an overall view, having regard to the point of view of a typical consumer. 25

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91. The necessary direct link thus also the competition and offering a chance to exists between the service supplied by the win, in return for which he actually receives organiser, consisting of the organisation the entry fees as consideration. The taxable and the provision of a chance to win, and amount therefore comprises the amount of the entry fees as consideration. the entry fees in full.

5. Deduction of input tax 92. The supply made by the organiser for VAT purposes includes the provision of the chance of winning, but not the paying out of winnings. As regards the paying out of winnings, there is no direct link to the consideration: the competitor pays the 95. In view of the fact that in accordance entry fee not on condition that he wins with the principle of fiscal neutrality of the but on condition that he receives a chance VAT system the taxable person must be to win, in other words in the hope of relieved of any value added tax on the winning. That a player cannot count with various cost components of his supply, it certainty on winning a prize is in the nature must be examined to what extent the of games of chance. organiser is entitled to deduct input tax for the prizes under Article 17 of the Sixth Directive.

93. Seen thus, the payment of winnings is not a supply of goods or a supply of 96. That winnings in a game of chance services for consideration within the mean- have no direct link in terms of consider- ing of Article 2 or Article 11 of the Sixth ation to the entry fees does not alter the Directive. Rather, for the organiser, it entitlement in principle to deduct input tax, constitutes a mere 'cost factor' for the since under Article 17(2) that presupposes provision of the service, specifically for merely that goods and services are used for providing the chance to win. the purposes of the taxable person's taxable transactions. That undoubtedly applies also to the prizes in kind paid out by the organiser, that is, the corresponding goods and services, such as travel.

101. That problem does not arise, how- ever, if the suggested answer is adopted, and the paying out of prizes is not to be regarded as a service supplied by the 6. The alternative question organiser of the competition. The prizes are only included as cost components in the service of providing a chance to win. For providing that chance of winning, the organiser receives the same amount from every competitor, whether he later turns out to be a loser or a winner. 99. In its second question, finally, the VAT and Duties Tribunal puts an alternative question in case the competition is to be regarded as supplied by the organiser to each individual competitor in return for the individual entry fee. The tribunal wishes to know in this respect whether, if the matter 102. Whether the taxable amount is related is looked at in this way, the taxable amount to the individual competitor or the whole consists of the amount of the entry fee, or competition consequently makes no differ- that amount less a proportionate part of the ence. The tribunal's alternative question amount paid out in prizes, or some other need not therefore be considered further. amount.

100. The basis of the question is no doubt 103. The answer to the second question the problem of setting off the losses of some must therefore be that under Article 11A(1) competitors against the winnings of others, of the Sixth Directive the taxable amount which then arises — generally — with for VAT purposes for the service of orga-

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nising a competition which is arranged for for the entry fees paid by them is the the competitors by the organiser in return amount of the entry fees.