Principle of fiscal neutrality prevails again for Rank

United Kingdom

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

The Commissioners for Her Majesty's Revenue and Customs v The Rank Group [2009] EWHC (Ch) 1244

Earlier this week the High Court rejected HMRC's combined appeal of last year's two VAT and Duties Tribunal decisions relating to the differential VAT treatment of both mechanised cash bingo (the "Bingo Appeal") and slot machines (the "Slots Appeal").  The High Court agreed with the Tribunal that the disparity in treatment breached the principle of fiscal neutrality.  The Rank cases could involve a repayment of some £61 million of overpaid VAT (although quantum is yet to be determined).  These cases also constitute "test cases" for over 1,000 outstanding similar claims.

Despite the fact that the provision of most betting and gaming facilities is an exempt supply for VAT purposes, there are specific exceptions to this exemption.  At the relevant times, these exceptions resulted in the provision of certain mechanised bingo games and the provision of gaming machines being subject to VAT at the standard rate.  Consequently, in contrast to a provider of VAT exempt gambling supplies, a provider of such mechanised bingo games or gaming machines had to account to HMRC for "output" VAT, although such a provider was able to recover any "input" VAT that it incurred on goods and services attributable to those supplies.

Bingo Appeal

The Bingo Appeal concerned the differential VAT treatment of bingo games played at Rank bingo clubs between 1 January 2003 and 31 December 2005.  The games fell within either section 14 or 21 of the Gaming Act 1968 (since repealed) and, although such games were all but identical as far as players were concerned, games played under section 21 were exempt from VAT but games played under section 14 were taxable.

Slots Appeal

The Slots Appeal concerned slot machines in Rank bingo clubs featuring a built-in random number generator ("RNG") which was responsible for creating the chance element in the games played on the machines.  Between 1 October 2002 and 5 December 2005 and pursuant to the VAT legislation in force at that time, Rank accounted to HMRC for VAT in respect of its slot machines with built-in RNGs albeit that comparable slot machines, which were instead serviced by a remote RNG, were treated as exempt from VAT.

Fiscal Neutrality

The key issue in the Bingo Appeal and the Slots Appeal was whether (as held by the Tribunal) the principle of fiscal neutrality (which precludes treating similar goods and supplies of services differently for VAT purposes and is intended to combat distortion of competition) had been breached. 

High Court's Findings

In dismissing HMRC's appeal, the High Court made the following observations:

Bingo Appeal

As the section 14 games and section 21 games of mechanised cash bingo were all but identical, the games were undoubtedly similar and (at a conceptual level) in competition for fiscal neutrality purposes; the relevant competition being between the relevant supplies being made and not between persons making those supplies.  The existence of competition should be assessed in a notional overall market, not an actual local market, and the identity of the supplier was irrelevant.  Accordingly, the fact that the games were both supplied by Rank did not matter.  As the differing VAT treatment led to a different financial outcome for Rank, that sufficed to distort competition.  There was no discernible justification for the differing tax treatment of mechanised cash bingo and the Tribunal had demonstrated no error of law.  Hence the Bingo Appeal would be dismissed.

Slots Appeal

The exemption from VAT relevant for the Slots Appeal did not apply where "the element of chance in the game is provided by means of the machine".  The High Court held that the "machine" referred to is obviously that which is constructed for playing the game of chance, that which the player plays and that into which a coin or token is inserted.    It was a question of fact whether the outcome of the game is determined by an external event (i.e. a remote RNG) which the machine records or is produced by the machine itself (i.e. a built-in RNG).   Like the Tribunal, the High Court held that the element of chance was not provided "by means of the machine" in the case of multiple-terminal (i.e. remote) RNGs and that there was no legal definition of the word "machine" which compelled the Tribunal on the evidence before it to find otherwise.  As a result, such machines were not "gaming machines" for the purposes of the VAT legislation.    Once it was determined that, as a legal matter, there were games of chance played on "gaming machines" (the supply of which was subject to VAT) and games of chance played on machines that were not "gaming machines" (which were not subject to VAT) it was apparent that a breach of the principle of fiscal neutrality may have occurred.  Applying the same principles (of similarity, competition and the distortion of competition) as in the Bingo Appeal, the High Court held that on the facts there had been such a breach and hence the Slots Appeal would also be dismissed.

It remains to be seen whether HMRC will seek leave to appeal the High Court's decision on the Bingo Appeal and Slots Appeal.

Slots Appeal: HMRC's alleged defence of due diligence

The Tribunal last year only issued an interim decision in the slot machines case (on the points that were subject to appeal in the High Court).  HMRC had raised the defence with the Tribunal that any breach of the principle of fiscal neutrality was objectively justified on the basis that the UK tax authorities had acted with due diligence in responding to the development of remote RNG slot machines by amending the relevant law with effect from 6 December 2005 (so that slot machines were subject to VAT regardless of the location of the RNG). 

The Tribunal allowed HMRC further time to adduce evidence to establish this defence and (whilst doubting the viability of such a defence) indicated that a reference would need to be made to the ECJ.   This due diligence defence was not considered by the High Court.  There is no suggestion that HMRC's right to adduce further evidence on this point has been curtailed and so the final outcome may still be a long time coming.

Revenue & Customs Brief 63/08

Following the Tribunal decisions in the Rank cases, HMRC released Revenue & Customs Brief 63/08 stating that its views remained unchanged in that VAT is and always has been properly due on supplies of mechanised cash bingo and on the takings of gaming machines.  It remains to be seen whether HMRC will amend such views in light of the High Court's decision.  HMRC will undoubtedly continue to pursue the "protective assessments" of bingo duty referred to in the Brief and issued to reflect any reduction of VAT available as a deduction from bingo receipts.