|July 29, 2013|
Previously published on July 2013
The First Tier Tax (FTT) tribunal’s recent decision in Sportech PLC and others v HMRC  UKFTT 210 has major tax implications for any company that runs prize competitions. The decision underlined the importance of differentiating between competitions where winning is dependent on participants’ skill, and those where winning is dependent on chance. The tribunal made clear that games of chance will be exempt from VAT under the Finance Act 1972, the Value Added Tax Act 1983 and the Value Added Tax Act 1994. In doing so, the tribunal provided an important framework for differentiating between the two types of competition.
The Claimant ran a ‘Spot the Ball’ competition where participants had to place a cross where they believed the football to be located on a photograph of a football match. There was no grid in which the participants had to place their cross, it was simply a photograph with the football removed. A panel of football experts subsequently decided between them where they believed the football should be located. Cash or other prizes were awarded to participants who had placed their crosses closest to the position which was decided on by the panel.
The question for the tribunal was whether this was a game of chance or a game of skill and, consequently, whether the Claimant was entitled to a refund of £72.5 million plus interest in VAT.
The tribunal held that this was a game of chance. Mr Justice Pool decided that, although the game was advertised as a “Football Skill Competition” and the winner was advertised to be the “most skilful” participant, skill would only take you so far in the competition. Luck was a necessary part of winning the competition and this was understood by the participants. Mr Justice Pool made clear that the realities of how the competition worked, rather than the label given to it by the parties, would determine what sort of game it was.
Under Notes to Group 4, Schedule 9 Value Added Tax Act 1994, a game of chance includes “a game that involves both an element of chance and element of skill.” (2(a)(1))).
With this in mind, Mr Justice Pool made reference to Hailsham LC’s judgment in News of the World v Friend  WLR 248 and stated at paragraph 124 that “the most that skill and judgment can do is to estimate the approximate position to place the participants cross.” It therefore logically follows that winning the prize is ultimately down to skill and chance and, in turn, is defined as a game of chance for the purposes of VAT.
Consequences of the decision
This decision means that VAT is not liable to be paid on any Spot the Ball competition where the result is decided by a panel of judges. If participants’ crosses had been compared with the actual position of the football (rather than the position deemed by a panel of judges), there would be a strong argument to say that this was less a game of chance, and more a game of skill.
Furthermore, it should be noted that if a game is a game of skill, the UK Gambling Commission does not require any form of licence. A game of skill is a “genuine prize competition” and is therefore free from statutory control under section 14(5) of the Gambling Act 2005. It is by this reasoning that operators of Spot the Ball competitions have been operating without UK Gambling Licences.
However, now that the Spot the Ball competition has been found to be a game of chance, it is likely to be defined as a lottery by the Gambling Commission. This requires a lottery operating licence from the Gambling Commission or registration with your local licensing authority and the price of this licence (and the application fee) depends on the annual proceeds which are made from the lottery. Not everyone, however, is permitted to run a lottery. Lotteries are the preserve of good causes and cannot be run for commercial or private gain.
The decision in Sportech v HMRC highlights the fact that companies wishing to run prize competitions, and in particular Spot the Ball competitions, need to be alive to the implications of how they choose to organise the game. A Spot the Ball competition which invites participants to put a cross (or crosses) in a grid and is judged by comparing the photograph to the original picture indicates a game of skill. The VAT implications of this could be vast but the advantage is that a licence need not be sought. However, a Spot the Ball competition which is judged by an independent panel of judges (such as those run by Sportech and Best of the Best plc) may well now be unlawful lotteries according to the UK Gambling Commission.
Sportech has disclosed that HMRC have been given permission by the Upper Tribunal to appeal the FTT ruling to award Sportech a £40 million VAT refund plus interest, with a hearing expected to take place in “early to mid 2014”. The decision to allow an appeal is somewhat of a surprise and will be the last resort for HMRC, as the FTT has twice found in favour of Sportech (originally upholding the group’s claim for a refund this March, after HMRC had initially rejected Sportech’s claim, and then turning down HMRC permission to appeal the decision in May).