Golden opportunity to gain VAT exemption

The VAT treatment of credits that can be redeemed after being purchased has been considered several times. The latest case, which the CJEU recently recorded as a referral from Lithuania considers whether gaming "credit" presented as gold in the game should be treated as VAT-exempt virtual currency when traded between players for profit. The Lithuanian tax authority has assessed this individual for underpaid VAT on the grounds that the income derived from this activity exceeded the VAT threshold and should be subject to VAT in Lithuania.

About the game; and the assessment

RuneScape offers players from around the world the chance to interact in its game environment via avatars that can be customised to each player’s unique preferences. While the game is free to use, to enhance the experience (and create a more unique avatar) players are offered the opportunity to pay a membership subscription and buy gold which can be exchanged in the game to "purchase" items or participate in games in unique worlds or quests. 

The term purchase here is in inverted commas as the terms of use of the website (like many of its competitors) make it clear that the gold is, in fact, a non-transferable license granted by the game’s operator to the player. Despite the game terms, the Lithuanian tax authority identified an individual that was purchasing the gold from other players in the game, before reselling it at a higher price. The individual was so successful that the income breached the local VAT registration threshold. 

In-game credit as a currency

The individual has appealed the VAT assessment and claimed that the "gold" should be treated, for VAT purposes, as a virtual currency. Thus, any trading income should be treated as VAT exempt. Alternatively, to reduce the VAT assessment, the VAT due on the trading should be calculated on the difference between the purchase and sale price of the gold (akin to a margin scheme supply most often applied to the sale of second-hand goods). While the Lithuanian court considered whether the gold could be treated like a multi-purpose voucher, it ruled this out and has not referred a question on this point.

The treatment that the gaming operator applied is not considered in the referral, but we expect that VAT was accounted for when the gamer paid the game operator, and the VAT was paid to the tax authority in the location of the player, rather than necessarily Lithuanian VAT.

Interestingly, there’s no consideration in the referral of the fact that the gold should not be traded (of course the parties’ detailed arguments might have more on this). Also, there seems to be an assumption that Lithuanian VAT is due on all the income. This suggests that the credit sold by someone who is not authorised to do so is no longer an electronically supplied service taxed where the buyer belongs, but rather is taxed by reference to the default rule for B2C transactions (ie VAT is due where the seller is located). Alternatively, it might be the case that, as there is no way to determine the correct place of supply, the only position is to assume all the buyers of these illicit credits were in Lithuania too.

What next?

The CJEU’s final decision in this referral is likely to be released next year and gaming companies should pay close attention to the decision in case it affects their business going forward. In our view, it seems unlikely that the CJEU will find that these in-game credits should be treated as virtual currency. However, if the court does find that the credit is equivalent to virtual currency for VAT purposes it is possible that this will have other, more serious, regulatory consequences for gaming companies. Further, if you ignore the operator’s terms of business, a better argument is that the credit is a form of multi-purpose voucher. However, this would seem like an odd result when the issuer did not treat the credit in this way.

In any event, the case is an important reminder of the opportunities and risks associated with this type of business model and whilst it only concerns VAT, a decision in favour of the taxpayer could have wider regulatory implications for the gaming industry.