L & L EUROPE LIMITED v Revenue & Customs (REMOTE GAMING DUTY - whether "cashback" payments meet the terms of section 160 Finance Act 2014 and are thereby "prizes")

Factual and Procedural Background

This appeal concerns the calculation of remote gaming duty (RGD) under Part 3 Chapter 3 of the Finance Act 2014 (FA14), as amended by the Finance Act 2017. The central issue is whether "cashback" payments made by the Appellant, an online casino operator licensed by multiple authorities including the UK's Gambling Commission, qualify as "prizes" under section 160 FA14 and are therefore deductible in the profits calculation under section 157 FA14.

The Appellant operates several online casino websites offering games of chance, with customers participating by depositing funds and playing games. Cashback payments are made to customers who lose all their deposits within a "session," calculated as 10% of lost deposits, and are credited to the customers’ cash wallets with no restrictions on withdrawal.

HM Revenue and Customs (HMRC) initiated an enquiry into the Appellant’s treatment of cashback payments in October 2021. The Appellant responded, clarifying that cashback payments are not "freeplays" but treated them as deductible prizes. HMRC disagreed, concluding that cashback payments were not deductible as prizes because they were paid to losing players and were not "won" in the ordinary sense. HMRC assessed the Appellant for under-declared RGD from April 2018 to March 2022, which the Appellant appealed.

The Tribunal received extensive documentary evidence and witness statements, including sworn evidence from the Appellant's Chief Executive Officer. The Tribunal made detailed factual findings about the nature of the Appellant’s operations, customer accounts, gaming participation, and the mechanics and conditions of cashback payments.

Legal Issues Presented

1. Whether cashback payments qualify as "prizes" within the meaning of section 160 FA14 and are therefore deductible as expenditure on prizes in the profits calculation under section 157 FA14.
2. Whether cashback payments represent a return of part of the gaming payment and thus fall within the deeming provision of section 160(3) FA14, making them deductible.
3. The proper interpretation and application of the statutory definitions of "prize," "won," and "gaming payment" within the context of remote gaming duty.
4. The relevance and application of statutory construction principles and case law to the interpretation of the RGD provisions.

Arguments of the Parties

Appellant's Arguments

• Cashback payments are prizes "won" by customers under section 157 FA14 because they are an inherent feature of the game of chance offered and represent a real financial cost to the Appellant.
• Section 160(1) expands the concept of prizes to include credited amounts that customers can withdraw on demand, which applies to cashback payments.
• The ordinary dictionary meanings of "prize" and "win" are broad and encompass rewards or recoveries, supporting the treatment of cashback as prizes.
• Case law, including Doyle v White City Stadium, Bretherton v United Kingdom Totalisator Company, and McCollom v Wrightson, supports a flexible understanding of "prize" and "win" that includes cashback payments.
• Alternatively, cashback payments represent a return of part of the gaming payment under section 160(3) FA14, which is a mandatory deeming provision requiring such returned amounts to be treated as prizes.
• Analogies with VAT cases demonstrate that cashback payments reduce the effective consideration received and thus should be deductible.
• The nexus between gaming payments and cashback is sufficient despite the timing and calculation method, and the statutory scheme does not require a strict game-by-game or stake-by-stake matching.
• The statutory purpose of RGD and the profits calculation supports deducting cashback payments to reflect the economic reality and avoid an inflated tax base.

Respondents' Arguments (HMRC)

• The statutory framework provides clear definitions of "prize" and "won," which require a prize to be a reward received as a consequence of chance falling in the player's favour in a single game of chance.
• The deeming provision in section 160(3) FA14 does not support the Appellant’s interpretation; it is limited to returns of gaming payments where no game of chance occurred, such as technical failures.
• Cashback payments are not prizes because they are paid after the conclusion of participation with a losing outcome; no element of chance remains, so no prize is "won."
• The concept of a "session" spanning multiple games is not recognized in the statutory scheme, which taxes individual acts of participation.
• Allowing cashback payments as deductible prizes would introduce unpredictability and undermine statutory certainty, enabling operators to determine taxable amounts.
• Analogies to VAT are inappropriate due to the differing tax regimes and statutory purposes.
• Case law, including Aspinalls Club Ltd v HMRC and Pinner v Everett, supports a narrow interpretation of "prize" consistent with successful outcomes exceeding the stake.
• HMRC accepts that returned gaming payments due to no participation (e.g., technical failure) are deductible under section 160(3), but cashback payments do not fall within this category.

Table of Precedents Cited

Court's Reasoning and Analysis

The Tribunal undertook a detailed examination of the statutory language of sections 157 and 160 FA14, the factual matrix of the Appellant's gaming operations, and the nature of cashback payments. It recognized that the profits calculation for RGD is performed on a cash basis within each accounting period, requiring the aggregation of gaming payments received and expenditure on prizes paid or credited within that period.

The Tribunal found that cashback payments are an inherent feature of the gaming contract offered by the Appellant, constituting one of the potential outcomes of participation in a game of chance. Customers participate knowing that in the event of losing all deposits within a session, they have the right to activate cashback equal to 10% of lost deposits. This right and payment represent a real financial cost to the Appellant and are credited to customers’ cash wallets as immediately withdrawable sums.

Applying the statutory language and purpose, the Tribunal concluded that cashback payments fall within the meaning of "prizes … won" under section 157(2) FA14, either directly or by virtue of the deeming provision in section 160(3). The Tribunal rejected HMRC’s narrow interpretation that prizes must be won in a single game event and that cashback, paid after losing outcomes, could not be prizes. It held that the statutory scheme contemplates a range of chance-dependent outcomes, including those over a session of games, and that cashback payments are properly treated as prizes for RGD purposes.

The Tribunal found the Appellant’s interpretation consistent with the statutory purpose of RGD to tax the net effect of gaming activities and to allow deduction of genuine expenditure on prizes. It distinguished the present case from the Aspinalls decision, emphasizing that the statutory provisions for RGD expressly differ from those governing bankers’ profits, allowing a broader interpretation of prizes.

Regarding the deeming provision of section 160(3), the Tribunal accepted that it primarily addresses returns of gaming payments where no game of chance occurred (e.g., technical failures). However, it also concluded that cashback payments, as contractual returns of part of gaming payments under the terms of participation, fall within this deeming provision alternatively.

The Tribunal declined to adopt the Appellant’s analogy to VAT cases, noting the distinct nature and purpose of RGD. It also rejected HMRC’s argument that the cashback payments are too far removed from gaming payments or represent payments for other purposes such as incentives or loyalty.

Ultimately, the Tribunal interpreted the statutory provisions purposively, recognizing the economic reality of cashback payments as prizes or returns of gaming payments, and consistent with the legislative intent to tax net gaming profits.

Holding and Implications

The Tribunal ALLOWED the appeal.

The Tribunal held that cashback payments made by the Appellant constitute "prizes … won" within the meaning of section 157(2) FA14, either directly or through the deeming provision in section 160(3) FA14. Accordingly, such payments are deductible as expenditure on prizes in calculating profits for remote gaming duty purposes.

The direct effect of this decision is that the Appellant is entitled to deduct cashback payments from its profits calculation, reducing its RGD liability for the relevant accounting periods. The Tribunal did not set any new precedent beyond the parties and the case before it, but it clarified the interpretation of statutory provisions regarding prizes and returns of gaming payments within the RGD framework.