[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 LTD	Appellant

	- 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

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 Channel Island 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 Member State;
…

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: “… WWA is 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.

19.	When WagerWorks was first formed it had seven employees: Oliver Manning who worked in Finance, Chrys Terry who was Customer Services Director and there were five support staff.  Mr Mathews had sole responsibility for establishing the business but remained employed by WW Inc, who originally provided network operations and website design from the US.  The number of employees in WagerWorks was never made entirely clear, but in a letter dated 25 April 2006 Deloitte and Touche LLP (“Deloittes”) on behalf of WagerWorks referred to there being 17 personnel in the Customer Services and Poker Room department, there is reference to an individual who was responsible for creating and maintaining customer gaming websites and to an account manager, but no reference to the total number of employees during the relevant period is made.  Mr Mathews provided a document showing 7 different departments and setting out the number of personnel in each as follows: Customer Support Services – 15 people, Security Services – 2 people, Poker Room Management – 1 person, Website Production and Design – 1 person, Sales, Advertising and Marketing Services – 5 people, Finance and Accounting Services – 4 people and Network Design and Maintenance – 7 people, making 35 in total.  It can be seen from that document that the four key areas referred to in the Services Agreement are broken down differently and have been expanded, and there are now seven main areas of operation, although in his affidavit, after referring to the above document, Mr Mathews stated that there were five main categories.  The work done in those five areas is described as follows:

1.	Telephone help desk/customer services.  WWA provides end-users with a telephone/email help desk service in order to answer questions or give information about game play/accounts details and also about status/log-in requirements. WagerWorks answers these queries through its telephone help desk or email account, although it is not known to the customer that it is WagerWorks and not WWA who is responding.

2.	Accounting.  Originally this was performed by Oliver Manning alone. It is nowhere mentioned that he has any professional accountancy qualifications, and his role is described as being Finance Manager.  Deloittes were used from time to time, but we were given no clear evidence of precisely what their involvement was beyond the evidence from the accounts that they were prepared by Deloittes, and the letters which they wrote on behalf of WagerWorks. At the relevant time WagerWorks had three full-time employees, including Oliver Manning, and one part-time worker in the accounting department.  Their function was divided into (i) banking and accounting services and (ii) management and statutory accounting services.

(i)	Maintenance of accurate banking and accounting and cash records is required to monitor the cashflow in and out of the Alderney bank accounts.  WWA operates a range of merchant bank accounts in various currencies that are used to accept debts from end-users and to pay out winnings, to pay clients and to pay WagerWorks.  Monthly review and reconciliation reports are submitted to WWA each month.  This requires two hours work per week, and three days each month end and is performed by the part-time employee.

(ii)	The provision of ongoing monthly and quarterly finance and management accounts and reports of the Alderney companies. Also monthly cash ratio and management accounts are prepared to present to the Alderney regulatory authorities, and annual and any other statutory accounts are prepared and submitted as necessary.  Assistance is given for the preparation of the audited annual accounts and tax returns, including liaising with the tax authorities.  The majority of the work of the accounts department is in this latter area, requiring three full-time staff.  Each WWA subsidiary has between three and five bank accounts, because of the complexity of the business, and withdrawals were made from them everyday.  In his oral evidence Mr Mathews told us that the department was managed on a day-to-day basis from the US.  Oliver Manning was there to take immediate responsibility but under the supervision of those in the US, and also to monitor the work of Deloittes.

3.	Sales and Marketing.  Between August 2003 and August 2005 this was performed by Mr Mathews.  In or about April 2006 a dedicated sales marketing team was established by WagerWorks to market the ‘managed services’ offered by WWA to prospective new clients and performing marketing and accounting managing services to existing customers.  This function was also outsourced to a one-man public relations firm to help with product launches and trade shows.  WW Inc worked with WagerWorks on sales and marketing.  The extent of the outsourcing and the input of WW Inc was not made clear, nor were these matters referred to in Mr Mathews’ witness statement or exhibit.  

4.	Website Production and Network Operations.  Each of WWA’s clients requires a specific online gaming website reflecting its particular brand.  There is only one person employed by WagerWorks on this work but there is a team working in the US employed by WW Inc.  The WagerWorks employees function is to liaise with WWA’s UK clients.  The websites themselves are designed in the US and rolled out to WWA after WagerWorks has obtained approval from the UK client.

The maintenance of the network is of critical importance to the functioning of WWA.  Games players need to access the website and play games online on a continual basis.  A team of seven people provide an on-call service at all times, and will be contacted either by WWA’s customer support team or by WW Inc when a problem is noticed.  It also recommends systems improvements and back-up and systems contingency planning, inter alia.  It is however unclear whether these people are employed directly by WagerWorks, given that a document provided by Mr Mathews refers to a ‘network operation centre’ which provides support to WWA and to WagerWorks.

5.	Security.  One person is employed to monitor the banking and other activities and to identify any unusual, irregular or fraudulent behaviour and report this to WWA’s customers, or, if possible prevent the activity.  In 2003 this was a function carried out by Chrys Terry together with his other duties, but in 2004, as the number of WWA’s customers expanded, and the complexity expanded, it was thought necessary to employ a dedicated security person.  

All these functions which were carried out by WagerWorks were subject to day-to-day supervision from the US.

20.	WagerWorks contracted with a company called Experien, a company which had carried out credit checks on customers wishing to be registered.  Legal advice would also be outsourced and would be invoiced to either WWA or WWInc.  Experien would invoice WagerWorks. The WWA companies pay the gaming commission for licences and for the rent which is paid to Cable & Wireless for the Baker Centre in Alderney.  WWA pays WWInc for this software, 15% of the royalties from winnings are paid back to WWInc and this comes off the top line of the gross earnings.  Any costs that are collected in the ‘Executive’ department are allocated on a monthly basis to the other department based upon the headcount in those departments.  The costs incurred by the Finance and Accounting Department which relate to the accounting function of WagerWorks and not WWA, are recharged to the other departments based upon headcount.  The Alderney companies are therefore paying for the cost of WagerWorks’ own accounting activities.  A total number of 35 people are ascribed to these different departments by Mr Mathews who, in his paragraph dealing with the accounting system, gives a different distribution of personnel, in particular he refers to there being 3 people in the Sales and Marketing department and 18 people being in a department referred to as ‘Customer Services and Poker Room’.  There are apparently no personnel in the ‘Executive’ department. The discrepancies between the numbers of personnel in the different departments and the departments themselves as given in correspondence and in different parts of the witness statement were never resolved.  

The Respondents’ case

21.	The Commissioners’ case as set out in the statement of case is that:

•	The single supply made by WagerWorks to the associated companies in Alderney is a single supply of comprehensive administrative support.  In effect, WagerWorks substantially “runs” the business of the offshore associated companies from its own establishment in the UK;
•	The supply made by WagerWorks to the associated companies in Alderney does not fall within the scope of Article 56 of the Principal VAT Directive;
•	The supply made by WagerWorks to the associated companies in Alderney is subject to Article 43 of the Principal VAT Directive.  Consequently the place of supply of the supply made by WagerWorks is the United Kingdom.

Mr Smith pointed to the fact that it was possible to describe the services provided by WagerWorks in a number of different ways, and whatever the precise nature of the services provided, they formed a single supply.  WagerWorks existed as a company solely to carry out the necessary functions of WWA and its subsidiaries, and this was not for normal business reasons but was the result of the unavailability of staff and appropriate infrastructure in Alderney.  WagerWorks provided whatever service was necessary to the business of WWA and its subsidiaries, and in effect what was provided was day-to-day management, which was a single supply.  

22.	Mr Smith referred us to the case of Levob Verzekeringen BV for the test of whether there is a single or a multiple supply.  In paragraphs 20-22 the European Court of Justice said as follows:

“20.	Taking into account, firstly that it follows from Art 2(1) of the Sixth Directive that every transaction must normally be regarded as distinct and independent and, secondly, that a transaction which comprises a single supply from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system, the essential features of the transaction must in the first place be ascertained in order to determine whether the taxable person is making to the customer, being a typical consumer, several distinct principal supplies or a single supply (see, by analogy, Card Protection Plan …).
21.	In that regard, the Court has held that there is a single supply in particular in cases where one or more elements are to be regarded as constituting a principal supply, whilst one or more elements are to be regarded, by contrast as ancillary supplies which share the tax treatment of the principal supply … .
22.	The same is true when two or more elements or acts supplied by the taxable person to the customer, being a typical consumer, are so closely linked that they form, objectively, a single, indivisible economic supply, which it would be artificial to split.”

23.	Mr Smith accepted that this case was not of the type referred to in Card Protection Plan where it was considered appropriate to analyse the supply on the basis of a principal supply with ancillary supplies which should be treated as a single supply for VAT purposes.
 
24.	We were referred to the following passage from the College of Estate Management in the House of Lords where Lord Rodger said:

“10.	“… but, since the Court envisages that the principal supply may itself comprise more than one element, plainly, in cases where there is no ancillary supply, a single supply may still be made up of more than one element.  So where a taxpayer is involved in a transaction in which he performs several services, none of which can be singled out as the dominant or principal supply, it may nevertheless be necessary to consider whether, for tax purposes, they are properly to be regarded as elements of a single supply … .”
12.	“… the question is whether, for tax purposes, these are to be treated as separate supplies or merely as elements in some over-arching single supply.  According to the Court of Justice in Card Protection Plan (at para 29), for the purposes of the Directive the criterion to be applied is whether there is a single supply ‘from an economic point of view’.  If so, that supply should not be artificially split, so as not to distort (altérer) the functioning of the VAT system the answer will accordingly be found by ascertaining the essential features of the transaction under which the taxable person is operating when supplying the customer, regarded as a typical consumer.  …”

25.	Mr Smith submitted that if the Tribunal find that there is a single supply, that supply must be considered as a whole.  While the supply does not have to come within one of the heads of services listed in Article 56, the services comprised therein must all fall within the activities there set out.  If any of those activities fall outside those listed then the whole supply is similarly not included, we were referred to the tribunal decision in American Express for this proposition.  

26.	The Commissioners did not accept that any of the services made by WagerWorks came within Article 56 or Schedule 5 to the VATA.  It was submitted that it was too simplistic to describe the customer services provided as the provision of information within Article 56.1(c). Data-processing and the provision of information within that section took their colour from the preceding category in the section, namely consultants, engineers etc and the legislation was contemplating services with an intellectual and advisory purpose.  We were referred to the cases of Linthorst at paragraph 20 where the ECJ noted that the only common feature of the disparate activities mentioned in that provision is that they all come under the heading of ‘liberal profession’, and Christiane Urbing-Adam where the ECJ set out the factors it considered characterised the liberal professions.  These were: “Activities which, inter alia, are of a marked intellectual character, require a high-level qualification and are usually subject to clear and strict professional regulation.  In the exercise of such an activity, the personal element is of special importance and such exercise always involve a large measure of independence in the accomplishment of professional activities.”  In the present case WagerWorks provided no intellectual value to the information provided.  It was further submitted that the information provided by the customer support team was not to WWA, but to WWA’s customers, which took the supply outside the provisions of Article 56.  

27.	With regard to the Accounting Services provided, the Commissioners did not accept that these were the same as the services of an accountant within Article 56.1(c).  The services provided were those of managing WWA’s financial affairs and, whilst the financial director was an accountant, he was not acting solely in that role but was performing a management function as well.  With regard to the banking function, it was not accepted that the activity described of putting money into the bank and tallying was banking within Article 56.  With regard to Sales and Marketing, it was submitted that the information given was limited and it was not possible to say in what proportion the supplies claimed were supplied.  Part of the supply was directed to consumers and part to WWA and it was not possible to say what element within that supply predominated.  Part of the advertising was done through an agency, and the agencies’ supplies may be to WagerWorks or direct to WWA, in which case they would not be within Article 56.

28.	With security it was submitted by Mr Smith that there was again insufficient detail given that what appeared to be done was monitoring which was not an electronically supplied service.  What was called ‘website production’ could not properly be characterised as such since the websites were built in the US and the only work done by WagerWorks was that one person obtained from the client companies what they wanted and provided that information to the US.  When the website was built this was shown to the client but the website was then produced and supplied from the US.

29.	The character of the supplies made by WagerWorks could not be taken from Network Operations, although it was accepted that that supply would be within section 56 if it were a separate supply but the character of the whole supply could not be taken from this one small element.  

The Appellant’s case

30.	WagerWorks primary case was that it made multiple supplies in Alderney.  If it was found that there was a single supply, that supply was made in Alderney and on either view those supplies were not taxable, falling as it was submitted that they do within Article 56.

31.	Mr Key submitted that the Commissioners’ approach was fundamentally flawed and that the correct approach was to evaluate and compare each individual element first to identify whether there is a single or a multiple supply and secondly, if there is a single composite supply, to identify its nature.  For this approach we were referred to the cases of Bophuthatswana NCC, Leightons, Wellington Hospital, and BT Plc.  We were also referred to the following passage in the case of Pilgrims Language Courses where Scheimann LJ in the Court of Appeal said at page 887c-d:

“The task of the Court is to look at each course separately and to adopt in each case the approach indicated in Card Protection Plan, para 29-31.  Thus the Court must (i) identify the various supplies involved, (ii) establish whether one or more principal supplies are involved and (iii) if there are more than one principal supplies establish, in relation to ancillary supplies to which principal supply each ancillary supply is ancillary.”

We were also referred to Card Protection Plan, Appleby Bowers and Levob at page 789a and 789e the ECJ said:
“Secondly, with regard to the question whether such a single complex supply is to be classified as a supply of services, it is vital to identify the predominant element of that supply …

“Article 6(1) must be interpreted as meaning that such a single supply is to be classified as a ‘supply of services’ where it is apparent that the customisation in question is neither minor nor ancillary but, on the contrary, predominates.”

32.	The Commissioners are also criticised for failing to identify which element of the supply they regard as dominant, a failure which is said to be fatal.  Mr Key identified the seven main categories of supply as being those identified in the document appended to Mr Mathews’ witness statement and set out at paragraph … above and he submitted that each one came within Article 56.  

33.	It was WagerWorks’ case that whilst the Services Agreement was the starting point, it was not in itself definitive, and the Commissioners had been wrong to base their decision upon it.  The various department were quite separate from each other, and the fact that WWA’s clients did not lead to the conclusion that there was one supply, as both WagerWorks and WWA know the underlying details.  

34.	It was WagerWorks primary case that multiple elements were involved and that each element was properly regarded as a ‘principal’ or ‘dominant’ element in its own right.  None of the individual element was ancillary to any other of the individual elements.  Each individual element was an object in itself, rather than merely being a means of better enjoying another principal element.  From the viewpoint of each Alderney company (i.e. the recipients of the services) and the customers in the transaction with WagerWorks, and also from an objective viewpoint, each individual element supplied by WagerWorks inter alia:-

(a)	has a separate and free-standing value in itself;
(b)	is of the essence;
(c)	is plainly part of the consideration for the Alderney company’s payment;
(d)	is an important part of what the Alderney company has contracted for; and
(e)	is an object  sought for its own sake.

None of the individual elements were so dominated by another element as to lose any separate identity as a supply for fiscal purposes.  Furthermore the economic reality was that the Alderney companies were each buying a number of separate elements from WagerWorks.  Mr Key pointed to the fact that the precise elements provided by WagerWorks differed depending on the need of the relevant Alderney company.

35.	Whilst it was WagerWorks case that there were multiple supplies, in the event that we were to find there was a composite supply, Mr Key identified Customer Services as being the dominant supply.  He submitted that the separation of costs into different areas indicated that there was a series of separate supplies, and the relative cash value of the supplies indicated the dominant nature of that supply.  Customer Services had the largest cash value and therefore was dominant.  It was also possible, he suggested, that the Website Production could be considered to be a dominant supply.  Such a supply would fall within one or more of the categories of Article 56 and the place of that single supply would therefore be Alderney and the supply would not be subject to VAT.

Reasons for decision

36.	We accept that Mr Key’s approach as set out in paragraph … above is the correct one, but we do not accept that it is incumbent upon us, if we find that there is a single supply, to identify a dominant supply and to deem the other supplies ancillary to that supply.  It is an important aspect of this case that WagerWorks exists solely to cater to the needs of WWA.  The evidence makes clear that WW itself does not determine the work that it does and the only documentary evidence that we have of the arrangements between WagerWorks and WWA is the Services Agreement which we are told no longer reflects the position.  Whilst that may be the case, it is nonetheless important for us to consider that document.  Whilst the work done and the number of people working in the different areas, as well as the number of areas of work has expanded, WW’s core business remains effectively the same.  There has been no change to the provision set out in Clause C of the Recitals, namely that WWA is managed and controlled from the US.  What WagerWorks is providing is as set out in the Recitals, namely specific services the infrastructure of which WWA has determined it is not cost effective to maintain.  Not only is it deemed not cost effective for WWA to maintain that infrastructure, but also the evidence shows that it is not possible because of the lack of personnel to maintain it in Alderney.

37.	Initially WagerWorks operated with only two senior level staff, Oliver Manning in Finance and Chrys Terry in Customer Services, the remaining five employees being customer support staff answering telephones.  Those answering the telephones were dealing not only with enquiries relating to problems arising out of the on-line gaming, but also problems relating to finance and other aspects of the business.  There is no evidence that the role of Customer Services had changed substantially by 1 April 2006, the time from which we are concerned.  The cost of maintaining the call centre is accounted for separately internally by WagerWorks, but WWA is charged a sum inclusive of all WagerWorks’ costs plus 10%, with no separation of the costs to reflect the different departments, nor is there any separate cost relating to the calls Customer Services handle on behalf of WagerWorks and those handled on behalf of WWA.  In our judgment it would be artificial to hold that Customer Services provide a separate service from any of the other areas of business carried on by WagerWorks.

38.	The Finance and Accounting Department (previously called ‘Accounting, Legal and Corporate Record-Keeping Services’), provides WWA with a complete bookkeeping and accounting function, and also liaises with advisers, lawyers and auditors.  It is however Deloittes who produce the accounts for WWA, not WagerWorks.  Oliver Manning, who is in charge of this department also carries out a management function and we consider that the services provided by this department are an integral part of the other supplies made by WagerWorks and not an independent supply.  

39.	It was not entirely clear from the evidence which of the various departments were operating during the relevant period, given the variation between Mr Mathews oral evidence, the evidence in his witness statement and the document he produced.  What is clear is that at the beginning there was a considerable overlap between the various departments and this overlap continued during the period under consideration, and is possibly the reason for the lack of consistent evidence with regard to them. Whatever the precise position at the time under consideration, there is no evidence before us which persuades us that any one supply is the dominant supply nor that any of the different supplies argued for is ancillary to any other.  In our judgment this is a case that is similar to that of College of Estate Management, referred to by Mr Smith at paragraph … above.  In that case Lord Walker, when considering the case of Madgett and Baldwin, analysed ‘ancillary’ as follows:

“30.	In the course of this appeal there has been much discussion of para 30 of the ECJ’s judgment.  In my opinion it is clear that this paragraph (which uses the introductory word ‘in particular’) is dealing with a particular case exemplified by Madgett and Baldwin.  It is not asserting that every distinct element of a supply must be a separate supply for VAT purposes unless it is ‘ancillary’.  ‘Ancillary’ means (as Ward LJ rightly observed … subservient, subordinate and ministering to something else.  It was an entirely apposite term in the discussion in British Telecommunications (where the delivery of the car was subordinate to its sale) and in Card Protection Plan itself (where some peripheral parts of a package of services and some goods of trivial value such as labels, key tabs and a medical card, were subordinate to the main package of insurance services).  But there are other cases (including Faaborg, Beynon and the present case) in which it is inappropriate to analyse the transaction in terms of what is ‘principal’ and ‘ancillary’, and it is unhelpful to strain the natural meaning of ‘ancillary’ in an attempt to do so.  Food is not ancillary to restaurant services; it is of central and indispensable importance to them; nevertheless there is a single supply of services (Faaborg).  Pharmaceuticals are not ancillary to medical care which requires series of medication; again, they are essential and indispensable importance; nevertheless there is a single supply of services (Beynon).”

WWA engage WagerWorks to provide them with everything they need to function on a basic day-to-day level, higher level management and strategic input are provided by WWInc, and special advice is sought outside from companies such as Deloittes.  That the Appellant is arranged into various departments in order to provide those services to WWA is irrelevant.  WWA covers WagerWorks’ costs plus a 10% mark-up.  There appears to be no autonomous management of the various Alderney companies, and they have no say in exactly what is provided to them on a job by job basis.  The services are not individually commissioned although Paddy Power contracted out of some of the services, and WagerWorks is retained to provide to WWA whatever services are necessary.  What is evident is that WWA could not function without the services provided by WagerWorks. The evidence shows that WagerWorks was established because it was considered uneconomic to buy in the services separately, but the fact that they could have been so bought does not, in our judgment  mean that it would be artificial to treat the services which are provided by WagerWorks as comprising a composite service.  

40.	In our judgment there is no necessity to find a compendium word to cover the compendium service provided.  Some of the services provided amount to somewhat more than ‘back office’ services, the phrase opted for by the Commissioners, and the services provided are those that WWA would provide itself were it able to obtain the personnel.  As stated above, we do not find that any one service is dominant, and find that there is a single supply for value added tax purposes.

41.	For the above reasons the appeal with regard to the issue of single or multiple supplies is dismissed.  Issues (ii)-(iv) in paragraph 2 above relating to the place of supply remain outstanding.	

MISS J C GORT
TRIBUNAL JUDGE
RELEASE DATE:17 August 2010