Differential VAT Treatment of Slot Machines

United Kingdom

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

Bank Group Ltd v The Commissioners for Her Majesty's Revenue & Customs, Decision Number 20777

In the second VAT case brought by it this year, the Rank Group is claiming a refund of £25 million of overpaid VAT paid in connection with slot machines with built in random number generators ("RNGs"). Legislation that was previously in force treated slot machines with internal RNGs as subject to standard rated VAT and machines with external RNGs as exempt for VAT. Rank's claim is that, since both of these types of slot machine are similar, their VAT treatment should be the same; in accordance with the principle of fiscal neutrality. Whilst the VAT Tribunal has agreed that Rank's claim is valid, HMRC has argued a defence of due diligence which, HMRC contends, is justified by European case law. The Tribunal has indicated that, if HMRC pursues this argument then, in order to determine whether it is a proper defence, the question will need to be referred to the ECJ. As a consequence, this case (on which similar claims of many other gambling operators will turn) may yet have a long time to run.

Despite the fact that the provision of most betting and gaming facilities is an exempt supply for VAT purposes, the provision of gaming machines, including slot machines, is generally standard-rated. Consequently, a provider of gaming machines has an "output" VAT liability which it will seek to pass on to its customers as a direct VAT cost. However, unlike a provider of exempt supplies, a provider of gaming machines will be able to recover any "input" VAT that it incurs on goods and services attributable to these supplies.

Between 1 October 2002 and 5 December 2005 and pursuant to the VAT legislation in force at that time, Rank Group Ltd paid a net figure of over £25 million in VAT in respect of slot machines in its Grosvenor Casinos and Mecca Bingo clubs. These slot machines featured a built-in random number generator ("RNG") which was responsible for creating the chance element in the games played on the machines. However, comparable slot machines, which were instead serviced by a remote RNG, were treated as exempt from VAT.

Rank Group Ltd claimed that HMRC's differing VAT treatment of these two types of slot machine contravened the principle of fiscal neutrality, which requires that supplies of services that are the same or similar should not be treated differently for VAT purposes. Consequently, Rank Group Ltd requested a refund of the £25 million of VAT it had paid in respect of its slot machines with built-in RNGs due to the fact that similar slot machines, differing only by virtue of having a remote RNG as opposed to a built-in RNG, were treated as VAT exempt during the same period. HMRC refused to refund this sum and so Rank Group Ltd appealed to the VAT and Duties Tribunal.

The Tribunal, which handed down its interim decision at the end of August 2008, agreed with Rank Group Ltd and held that the two categories of supplies were similar and that HMRC's disparity in treatment breached the principle of fiscal neutrality. Further, the Tribunal held that there was no need for Rank Group Ltd to identify a distortion of competition or imbalance in the market as an additional requirement to establishing a breach of fiscal neutrality.

However, HMRC went on to submit that if there had been any breach on its part of the principle of fiscal neutrality, such a breach was objectively justified. The basis of its submission was that the UK had acted with due diligence in responding to the development of remote RNG slot machines by amending the law with effect from 6 December 2005 so that slot machines with remote RNGs were no longer treated as VAT exempt, but rather, like the comparable slot machines with built-in RNGs, became subject to VAT at the standard rate.

This defence of due diligence put forward by HMRC stems from ECJ case law relating to the principle of non-discrimination, which requires that similar situations must not be treated differently unless it is objectively justified. In particular, HMRC sought to rely on an ECJ decision which held that where a difference in treatment arises out of new developments, the public authority is obliged to remedy the difference but is only in breach of the principle of non-discrimination if it shows a lack of diligence (which is a question of fact).

The Tribunal concluded that further evidence would be required in order for HMRC to establish such a defence. Interestingly, the Tribunal indicated that whilst it was inclined to view that a due diligence defence was not possible, it could not conclude as such without referring the matter to the ECJ. The Tribunal has therefore determined that if HMRC adduce evidence to establish that the UK acted with reasonable due diligence, then a reference will be made to the ECJ.

The outcome of this decision has been eagerly awaited by the gaming industry as approximately 1,100 appeals by other slot machine operators have been stood over pending its outcome. The decision therefore has serious implications for HMRC in terms of its potential liability to repay substantial sums of VAT to these slot machine operators. However, any final outcome could be a long time coming as HMRC have been given time to adduce further evidence to establish its defence. Furthermore, if a reference to the ECJ is made we could be waiting a further two to three years for the ECJ to hand down its decision.

This is the second case involving Rank Group and HMRC that has been heard by the Tribunal this year. The first case, which was also heard in April 2008, has resulted in Rank Group Plc reportedly recovering £59.1 million in overpaid VAT after successfully arguing that HMRC's disparity in VAT treatment between two comparable bingo games breached the principle of fiscal neutrality. HMRC have appealed against this decision and the appeal is scheduled to be heard in the first half of 2009.