The Rank decision and its implications

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

We reported in June upon the High Court's decision to reject HMRC's combined appeal of the two VAT and Duties Tribunal decisions relating to the differential VAT treatment of both The Rank Group's mechanised cash bingo (the "Bingo Appeal") and its slot machines (the "Slots Appeal") on grounds of fiscal neutrality. Since then, HMRC has sought leave to appeal the High Court's decision (in relation to both the Slots Appeal and the Bingo Appeal) and has released two Briefs setting out its current position and the implications for taxpayers in relation to claims for overpaid VAT and under declarations of bingo duty.

Slots Appeal

VAT implications

As explained in our previous report, the High Court's decision on the Slots Appeal relates to an interim ruling of the Tribunal. The gaming machine case is continuing (because HMRC is still entitled to adduce evidence to support its defence of due diligence) and it is understood that a hearing in the Tribunal is scheduled for later this year. As a result, HMRC states in Revenue & Customs Brief 40/09 ("Brief 40/09") that it will not at this time consider any claims for overpaid VAT in relation to gaming machines.

Bingo Appeal

VAT implications

HMRC maintains that certain mechanised cash bingo participation fees remain liable to VAT but accepts that unless HMRC is successful in its appeal then the High Court decision (that all participation fees for mechanised cash bingo are exempt from VAT) has effect for all operators of mechanised cash bingo which are in the same position as The Rank Group.

In Brief 40/09, HMRC states that it will now consider claims for output VAT incorrectly accounted for by bingo operators on mechanised cash bingo participation fees. Taxpayers who have overpaid such output tax (and have not yet made claims) may now, in relation to accounting periods ending after 31 March 2006, either make a claim for such amount or (if the total adjustment is £10,000 or less, or is less than £50,000 and less than 1% of the total sales figure (excluding VAT) shown in that VAT return) make an adjustment in their next VAT return.

Should an amount in respect of overpaid output VAT be paid by HMRC to a company then such amount is likely to be subject to corporation tax as a trading receipt. Any associated interest due from HMRC will also be subject to corporation tax as interest on a money debt.

Bingo duty implications

Bingo duty is calculated on bingo receipts (after deduction of any VAT) minus winnings. Following the High Court's decision, therefore, if VAT has been deducted from mechanised cash bingo receipts when calculating the amount of bingo duty due then bingo duty has been under declared.

In Revenue & Customs Brief 55/09 ("Brief 55/09"), HMRC explains that taxpayers are required to make adjustments in their September 2009 bingo return for any under declared bingo duty in respect of prescribed accounting periods from September 2006 onwards (unless they have already done so or HMRC has already made an assessment in respect of the underpaid duty). Any failure to so adjust could leave taxpayers liable to penalties.

As taxpayers' liability to bingo duty remains dependent upon the final outcome of the Bingo Appeal, HMRC acknowledges that taxpayers may wish to make protective claims (and appeal their subsequent refusal) to recover such additional bingo duty in the event that HMRC is successful in its appeal to overturn the High Court's decision regarding VAT.

Wider implications?

Rank has so far had considerable success with its arguments on the principle of fiscal neutrality (which precludes treating supplies of similar goods or similar services differently for VAT purposes and is intended to combat distortion of competition). It is interesting to note that in each of the Slots Appeal and the Bingo Appeal, the supplies in question were not just similar but, for all intents and purposes, identical. It is conceivable, however, that the principle of fiscal neutrality might ultimately prove to have a much wider ambit.

The High Court's judgment supports this conclusion due to the way in which it tackled the key questions of whether the services were (a) similar and (b) in competition with one another. The similarity of the supplies in question was assessed "at a high level of abstraction" by reference to whether they had similar characteristics and met the same needs from the point of view of consumers. Likewise, the existence of competition between the supplies was assessed "at a general and unspecific level" by reference to a notional overall market and not an actual market, and the fact that the consumer could not perceive a difference did not preclude the finding that there had been a distortion of competition. The conclusions of the High Court almost go as far as suggesting that if goods or services are sufficiently similar then they must be in competition with one another. Should this judgment not be overturned in the future, therefore, the fiscal neutrality doctrine as described by the High Court would seem to be of potentially wide application.

Although not specifically argued by Rank, HMRC acknowledges in Brief 55/09 the possibility that the High Court's decision might extend beyond mechanised cash bingo to encompass participation fees charged on all bingo (and thereby include main stage bingo as well as interval bingo). While HMRC states that it does not accept such an extension, it indicates that it will raise protective assessments for bingo duty on all bingo (although payment will not be enforced until and unless justified by the final outcome).

In light of this, bingo operators (to the extent they have not yet done so) might well wish to make claims themselves in respect of overpaid output VAT on participation fees on all bingo in relation to accounting periods ending after 31 March 2006.

If Rank is ultimately successful with its fiscal neutrality arguments then there may also be scope to make claims on grounds of fiscal neutrality in other areas.