In a recent decision of 13 February 2024, the First Tier Tax Tribunal has held that 'cashback' payments are deductible when calculating profits for the purposes of Remote Gaming Duty (RGD).
Background
In the case of L & L Europe Limited v The Commissioners For His Majesty's Revenue and Customs, the Tribunal had to consider sections 157 and 160 of the Finance Act 2014 (as amended with effect from 1 April 2018 by Finance Act 2017) (FA 2014) to determine whether 'cashback' payments can be treated as expenditure on prizes and are therefore deductible in L & L Europe Limited's calculation of profits on ordinary gaming.
L & L Europe Limited runs online casinos through various websites. It is regulated by a number of authorities, including the UK's Gambling Commission. The design, development and operation of the software hosted on the websites, to enable customers to participate in L & L Europe's games, is outsourced to a third-party software/games provider. To operate a game of chance for customers, L & L Europe fixes a return to player (RTP) ratio for the games. The percentage of RTP set by L & L Europe determines the percentage of payouts, as prizes, made from the games to customers and how much profit is left for L & L Europe (and the games provider).
As part of its business model, L & L Europe operates a scheme whereby customers who lose all deposits and satisfy certain conditions (as set out below) are able to activate a no-strings-attached 'cashback' payment equating to 10% of deposits made and lost. Pursuant to s.157(1) FA 2014, which allows for the deduction of expenditure on 'prizes' (as defined in s.160) from the aggregate payments made by customers, L & L Europe deducted the cashback amounts from its profit calculation when self-assessing its liability to RGD. In this case, L & L Europe explained, and the FTT accepted, that the cashback scheme was introduced and is used as it "has the effect of ensuring every player is allocated a proportion of RTP in a way which cannot be achieved by varying the RTP itself".
HMRC challenged L & L Europe 's calculation of profits for RGD and assessed L & L Europe to a further £807,284 of RGD. The assessment was upheld on review and L & L Europe 's appeal went to the Tribunal.
Mechanics of the 'cashback' payments
In its evidence, L & L Europe presented an explanation and various examples as to how this scheme works. The key points to note are as follows:
- cashback payments are made into the customer's cash wallet, which also includes all deposits made by the customer and cash winnings – L & L Europe therefore contends that there is no way of differentiating the source of the sums contained within the cash wallet;
- the customer can withdraw cash from the cash wallet at any point, subject to what are described as "administrative requirements";
- the cashback offer can only be activated by registered customers once certain conditions are satisfied:
- the customer has made a payment/deposit to participate in gaming;
- at least 24 hours have elapsed since the customer has made this deposit;
- the customer has used and lost the full value of their deposit, together with any winnings not withdrawn since the time the deposit was made; and
- there is less than £10 in the customer's cash wallet;
- once the offer has been activated, the 10% cashback payment is calculated only on deposits made by the customer to participate in gaming.
It is only once all these conditions are satisfied that the customer can activate the cashback – based on the sequence of events, this may be immediately on expiration of the 24-hour timer, or it may take longer. The 24-hour timer resets if a customer makes a withdrawal from their cash wallet before exercising the cashback, and the amount of the withdrawal is deducted from the amount of the deposits used for the calculation at (4) above.
L & L Europe contended that the cashback payment "represents a real financial cost" once it is credited to the customer's cash wallet.
Taxpayer's arguments
L & L Europe's primary argument is that the cashback payments are 'prizes' within the meaning of s.160 FA 2014, which states that provision of a prize includes crediting money to an account if the person is entitled to withdraw it on demand. The definition also allows a return of all or part of a gaming payment to be a deemed prize. In L & L Europe's view, the cashback payments were inherently linked to the gaming activity and were a direct consequence of participation, and thus fell within the ordinary meaning of 'prizes'.
Additionally, L & L Europe relied on s.160(3) FA 2014 and maintained that, in the alternative, the cashback payments were a return of part of the gaming payment made by the customer and, therefore, should be deemed as expenditure on prizes.
In both arguments, L & L Europe claims that the cashback payments amount to expenditure and can be deducted in its calculations of profits on ordinary gaming.
L & L Europe also referred the Tribunal to various cases where cashbacks were considered in the context of VAT. L & L Europe applied the approaches taken in those cases to support its argument that the cashback payments reduced the gaming payments made by customers to participate in gaming sessions. However, the Tribunal disregarded this comparison.
HMRC's arguments
HMRC argued that RGD clearly distinguished between 'win' and 'lose' outcomes, and a 'prize' can only arise on a win outcome. Therefore, they argued, any payments on loss should not be deductible as they are ex gratia payments to losing customers.
In their submissions, HMRC argued that the Tribunal must consider the common law interpretation of the words 'prize' and 'won'. Even though the Tribunal considered this argument, they ultimately dismissed it.
HMRC further rejected the argument that the cashback was a part return of the gaming payments, on the basis that the deeming provision under s. 160(3) FA 2014 should be construed narrowly; the 'cashback' payments are not linked to individual gaming events (thereby raising an argument of remoteness) and the 10% return could not be tied to a single gaming payment on a stake-by-stake basis (rather an aggregate of multiple payments). HMRC criticised L & L Europe's reliance on s. 160(3) as bringing 'unpredictability' and asserted that if that argument were correct, it would mean that gaming operators would decide when RGD is payable.
In their narrow interpretation of the deeming provision, HMRC described the cashback payments as "a fixed percentage payable when certain conditions are met" such that they cannot be considered a prize 'won' or a part return of the payment made by a customer to participate in gaming. The Tribunal disagreed with this argument and determined that this limited interpretation is "deliberately expanded" under the FA 2014 provisions.
Tribunal's decision
The Tribunal held that the 'cashback' payments were prizes, as they were inherently linked to the game offered by L & L Europe. They concluded that there was no difference between:
- any sum won immediately as a result of winning a game;
- sums won from accumulated winnings from participating in a series of games; and
- sums received from L & L Europe 's cashback payments.
In reaching this conclusion, the Tribunal relied on s.157(2) FA 2014, where they interpreted the requirement under the provision for a payment made to a customer to be "one of the potential outcomes upon participation in a game of chance".
The Tribunal pointed out that these 'cashback' payments were paid into the customer's 'pot' with no differentiation between these amounts and any 'winnings' from games. These payments represented a real cost to L & L Europe and it would be contrary to the construction of the RGD tax calculation to disallow them – it is clear that profits for RGD purposes are calculated on a 'cash basis' rather than 'accruals basis', so focus is placed on the reality of the sums actually received by L & L Europe less any sums paid to the customer.
Further, and for completeness, the Tribunal confirmed that these payments were undoubtably a calculable portion of the gaming payment so would have been deemed prizes. This decision was, in part, based on the Tribunal's view that the calculation of RGD is determined on the "net operation of gaming".
The appeal was allowed, and so L & L Europe was permitted to deduct these amounts.
Whilst HMRC's predicament is clear – wins or losses, the amount on which RGD is calculated goes down, the decision is tightly framed by reference to the primary legislation. At this point it is unclear whether HMRC will appeal.
It is important to note that the Tribunal's decision may not apply to cashback arrangements, the conditions of which differ from this case. This decision should therefore not be relied on as an approach to the calculation of RGD as regards cashback payments absent an analysis of the principal terms and conditions of such payments.
Mishcon de Reya's Innovation Department includes an industry recognised Betting and Gaming practice which advises on all corporate, commercial and regulatory issues affecting the gambling industry, including direct and indirect taxation.