Flashback on ECJ cases C-498/99 (Town & County Factors) – The full amount of the participation costs received by the organizer of a game forms the taxable amount

On September 17, 2002, the ECJ issued its decision in the case C-498/99 (Town & County Factors).

Context: Sixth VAT Directive – Scope – Competition whose organiser binds himself in honour only – Taxable amount

Article in the EU VAT Directive

Article 2(1) and 11A(1)(a) of the Sixth VAT Directive (Article 2(1)(a), 73 of EU VAT Directive 2006/112/EC)

Article 2
1. The following transactions shall be subject to VAT:
(a) the supply of goods for consideration within the territory of a Member State by a taxable person acting as such;

Article 73 (Taxable amount)
In respect of the supply of goods or services, other than as referred to in Articles 74 to 77, the taxable amount shall include everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party, including subsidies directly linked to the price of the supply.

Facts

Town & County is registered for VAT purposes as the representative member of a group of companies, one of which organised a weekly Spot the Ball competition, in particular from June 1994 to November 1995.
The entry forms for those competitions contain a photograph taken during a football match from which the ball has been blanked out. The object of the competition is to indicate by a cross where, in the contestant’s opinion, the centre of the ball is. Competitors may put up to 900 crosses on the photograph, and the entry fee payable depends on the number of crosses marked. The competitor whose cross is nearest to the place where, in the panel’s opinion, the centre of the ball is wins the first prize. The second prize is awarded to the competitor whose cross is next best placed, and so on.
The rules of the competition, which are printed on the entry forms, state inter alia that competitors agree that the obligations created for the organiser of the competition are binding in honour only.
It is common ground that during the period at issue in the main proceedings, June 1994 to November 1995, the organiser never refused to pay or transfer to the winners the prizes indicated on the entry forms. Those prizes, which consisted of money, goods or services, were always paid out to the winners and financed by the entry fees received. It is also common ground that neither the rules of the competition nor national legislation obliged the organiser of the competition to pay the cash prizes or pay for the non-cash prizes out of the entry fees.
Following the judgment of 5 May 1994 in Case C-38/93 Glawe [1994] ECR I-1679, Town & County, which had until then always calculated the VAT it was liable for on the total amount of the entry fees received, considered that it was liable for VAT only on that amount less the value of the prizes awarded to the winners.
On 28 March 1995 the Commissioners decided that Town & County was liable for VAT on the full amount of the entry fees received.
Town & County appealed against that decision to the VAT and Duties Tribunal.
The tribunal considered that the outcome of the proceedings before it depended on the interpretation of Community law, and in particular on whether the fact that the organiser of the competition was bound in honour only, which cast doubt on the existence of any legal relationship between the organiser and the competitors, meant that the organisation of the competition could not be regarded as a supply of services within the meaning of Article 2(1) of the Sixth Directive. It therefore decided on 3 June 1997 to stay the proceedings and refer a question on this point to the Court for a preliminary ruling.
The High Court of Justice of England and Wales held, on appeal, that the tribunal should also refer to the Court the question whether the taxable amount within the meaning of Article 11A(1)(a) of the Sixth Directive consisted of the full amount of the entry fees received rather than the net amount after deduction of amounts corresponding to the prizes distributed.

Questions

(1) On a proper interpretation of Council Directives 67/227/EEC of 11 April 1967 and 77/388/EEC of 17 May 1977, in particular Articles 2(1) and 6(1) of the latter, and having regard to the case-law of the Court, in particular Case C-16/93 Tolsma [1994] ECR I-743, is a transaction which is agreed by the parties thereto to be binding in honour only (and therefore unenforceable under domestic law by legal proceedings) capable of being a taxable transaction for the purposes of value added tax?

(2) If the answer to Question 1 is in the affirmative, then, on a proper interpretation of the said directives, in particular Article 11A(1) of the latter, and having regard to the case-law of the Court, in particular Case C-38/93 Glawe …, is the taxable amount for the purposes of value added tax in respect of the services of organising a competition supplied by the organiser to entrants to the competition in return for the entry fees paid by the entrants –

(a) the amount of the entry fees, or

(b) the amount of the entry fees less the amount or value of the prizes given to the successful entrants, or

Alternatively, if those services are correctly to be regarded as supplied by the organiser to each entrant in return for the entry fee paid by that entrant, is the taxable amount in respect of each such supply –

(a) the amount of that entry fee, or

(b) the amount of that entry fee less a proportionate part of the amount or value of the prizes given to the successful entrants, or

AG Opinion

(1) Under the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover tax – Common system of value added tax: uniform basis of assessment, in particular Article 2(1), a transaction which the parties agree to be ‘binding in honour only’ (and therefore under national law cannot be enforced in the courts) may in principle constitute a taxable transaction for the purposes of value added tax.

(2) Under Article 11A(1) of the Sixth Directive, the taxable amount for value added tax purposes for the service of organising a competition which is arranged for the competitors by the organiser in return for the entry fees paid by them is the amount of the entry fees.

Decision

1. Article 2(1) of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment must be interpreted as meaning that a supply of services which is effected for consideration but is not based on enforceable obligations, because it has been agreed that the provider is bound in honour only to provide the services, constitutes a transaction subject to value added tax.

2. Article 11A(1)(a) of the Sixth Directive 77/388 must be interpreted as meaning that the full amount of the entry fees received by the organiser of a competition constitutes the taxable amount for that competition where the organiser has that amount freely at his disposal.

Summary

A service rendered for consideration, but not on the basis of legally enforceable obligations, because it has been agreed that the service provider assumes only a debt of honor in respect of this service, constitutes a transaction subject to VAT.

The full amount of the participation costs received by the organizer of a game forms the taxable amount for this game, if the organizer can freely dispose of said amount.

Source