Location, location, location
Prior to 1 September 2007 it was illegal for on-line gaming companies to establish their operations in
the UK. As a result, during the early 2000’s many operators and service providers set up businesses
in offshore jurisdictions such as Alderney. Due to the fact that Alderney has no gaming tax or VAT
regime this also created a tax advantage for operators as betting and gaming is VAT exempt in the
UK meaning that companies are not entitled to recover any VAT they incur on expenditure
associated with these activities.
When the Gambling Act 2005 was fully introduced in the UK, with effect from 1 September 2007, on-
line gaming was legalised. However, UK government simultaneously introduced a gaming tax,
Remote Gaming Duty which would require operators establishing business in the UK to pay 15% of
the gross win generated. This coupled with the potential irrecoverable VAT on associated costs
created a punitive indirect tax regime for industry and many found the option of relocating business
to the UK financially unviable. In addition, operators were satisfied that Alderney had implemented
stringent procedures and controls within its licensing regime ensuring that the industry sector was,
and remains one which is extremely well regulated.
For the purposes of indirect tax a company can be seen to be established in more than one
jurisdiction. The country where the company is incorporated can be seen to be the location where
the business holds its legal title and typically represents its ‘business establishment’.
A company can also create a ‘fixed establishment’ by virtue of having human and technical resource
located in another jurisdiction. This can be either by way of employees (including Directors) also
being employed by an associate or subsidiary company which is located in the UK, or other EU
Member State, or by employees of the offshore company residing in a different country to that
where it is incorporated.
Where a company has more than one ‘establishment’ then to determine the place where services
are received, which in turn provides the VAT treatment for those supplies, a company must look to
which establishment is most closely linked with the receipt of those supplies.
Legal Background – 1997 – 2009
Under the VAT rules in force at the time, the place of supply of services (and hence the country of
taxation) varied according to the particular type of service being supplied. In summary, services were
taxed in the country of the supplier entity unless an exception applied. The main exceptions were a
wide range of intangible services including copyright and intellectual property, advertising, legal and
accounting services, telecoms, electronically supplied services and broadcasting. These, in a
business- to- business context were taxed in the country of the consumer.
Many operators, when establishing operations in Alderney, retained central support functions in the
UK. These functions, including IT support, marketing, HR, legal and accounting, and customer
services could be supplied by remote means. In addition they are not services seen as integral to the
determination of the result of the gaming and fall outside functions which, under the Alderney
licensing regime are required to be located in the Bailiwick. As such, operators did not have to incur
considerable costs in relocating employees to Alderney or Guernsey.
Where companies are established in more than one territory (eg operating company in
Alderney/Guernsey and central support functions supplied by an associated company in the UK), it is
necessary to determine which establishment was the recipient of the services so that the
appropriate VAT treatment could be applied. The UK rules in place at the time suggested that an
establishment only needed the capability to receive the services. It was widely accepted at the time
that as the services related to the provision of on-line gaming, it was the operator of the gaming
receiving such services.
For betting and gaming companies located in Alderney, a jurisdiction without a VAT regime, these
rules ensured that UK VAT was not charged on the majority of expenditure incurred by gaming
operators in relation to central service functions.
Legal Background – 1 January 2010 – 30 June 2011
The EU VAT Directive was amended with effect from 1 January 2010. The place of supply of most
services supplied to business customers became the country where the customer has established its
business with relatively few exceptions. The UK amended its test for determining the location of the
customer with more than one establishment to the establishment “most directly concerned with the
In practice this change had little effect on HMRC policy and the widely accepted practice of the
supply of services from central functions established in the UK being received by the operators in
Alderney remained in place.
Legal Background – 1 July 2011 onwards
On 1 July 2011 the EU Council Implementing Regulation (282/2011) took effect. Within the
Implementing Regulations are provisions governing the place where a business is deemed to be
located for VAT purposes.
A business will now be deemed to be established, for VAT purposes, where “the functions of the
business’s central administration are carried out”. In order for this to be determined, it is necessary
to take into account:
- The place where essential decisions concerning the general management of the business are
- The place where the registered office of the business are located, and
- The place where management meets
In the event of any uncertainty, point 1 above is considered the most influential factor.
It should also be noted that the mere presence of a postal address may not be taken to be the place
of a business establishment of a taxable person.
The concept of the “essential decisions concerning the general management” is a relatively new one
and one which, we understand, has not been tested by the courts. It is clearly a concept that is far
wider than strategic management decisions and could include for example decisions made in
connection with the day-to-day operation of the business.
The concept is far wider than looking at the location of the legal form of the company and requires a
review of the practicalities of implementing day-to-day management of the operations. As such,
HMRC will always take a “substance over form” approach when reviewing such structures. A prudent
approach would be for business to ensure that NO management decisions are made outside of
Alderney/Guernsey. This would reduce the risk of any successful challenge by HMRC.
Key Personnel licences
The AGCC requires key personnel of an applicant company to satisfy a probity test. This ensures that
the individual is suitable to hold a gaming licence. Persons who may be deemed to be “key
personnel” include the CEO, Directors and shareholders with a certain holding of share capital, other
decision makers within the company, and persons who have root level access to computer systems
and/or those who are able to influence the outcome of a game or customer accounts.
It is important to distinguish the regulatory requirements of a Key Personnel licence from the
subjective test to be applied when determining the VAT treatment of services supplied to an on-line
In relation to VAT, the “general management” concept is wider than the criteria for when an
individual requires a Key Personnel licence. For VAT purposes, each supply would need to be
reviewed individually to determine whether it was received in Alderney rather than the UK or other
EU Member State. This is likely to be governed by where the day-to-day management decision to
order the goods or services to which the supply relates was made.
This is much wider than the criteria for Key Personnel Licences which only require individuals who
are strategic decision makers, company share holders or personnel who have the ability to influence
the outcome of a game.
Other UK taxes
It should be noted that the test under the VAT regulations is different than the test applied to
determining residency for UK Corporate Tax purposes (including: does the Board have sufficient
expertise to control the business such that the Board is independently able to take strategic
decisions; the residency of individuals sitting on the Board; and the location of Board meetings).
In addition, the test for where a business is established for UK gaming duties are different again.
Remote Gaming Duty provides an objective test referring to the location of key equipment used in
the playing of the game and determination of the result, whereas on line operators offering sports
book (whose activities would, if found to be performed in the UK, fall within General Betting Duty)
are required to consider the structure of their operations from a subjective perspective by reference
to a “basket of indicators” contained within HMRC guidance. However, this, as with the VAT position
has not been tested in the Courts to date.
Potential VAT consequences
An operator, who has certain functions of its business established in the UK (or other EU Member
States), should undertake a review of its operational structure from the perspective of the new
regulations. Where it is deemed that supplies have been received in the UK or other EU Member
States and VAT is found to be chargeable, such VAT is likely to be irrecoverable representing an
absolute cost to the business. In addition, the tax authorities could seek to assess VAT
retrospectively and also have the power to impose interest and penalty charges.
Given that the standard rate of VAT in the UK is currently 20% such costs could be significant. Our
industry experience suggests that the higher value services which would be affected include affiliate
fees and charges; marketing and promotion; central support functions such as IT, Finance, HR, and
accountancy and legal. However, this list is by no means exhaustive and companies would be
required to consider the VAT treatment of all services received from the UK and/or other Member
HM Revenue & Customs position
We are aware that HMRC have, and continue to launch investigations in relation to this. They have
also taken the previously unprecedented step of visiting on-line gaming companies located in
Gibraltar with a view to understanding the industry sector and reviewing the size and nature of
resource (technical and human) located there.
To date, we are aware of only one case which has proceeded to litigation within this industry sector.
HMRC determined that WagerWorks UK Ltd was supplying management services to its associated
company in Alderney which should be subject to UK VAT. In the First-Tier Tribunal, the Judge agreed
with HMRC’s analysis and stated that, based on the facts presented, “WWA (the Alderney entity)
could not function without the services provided by WagerWorks.”
It should be noted that this case relates to periods prior to 2009 and as such is based under the old
VAT rules in place at that time. As the Tribunal agreed with HMRC and found that the services were
of “management” then the place of supply test was not needed to be discussed.
At the time of writing there has been no further appeal in relation to this and as such it may be the
case that the company has accepted the position and financial consequences for the period in
However, it does show that HMRC are now seeking to challenge business’ within this industry sector
and we are aware of a number of other operators who have received queries from HMRC in relation
to the structure of their on line operations.