Gaming machines were not "broadly comparable" for tax purposes, Court of Appeal rules

Rank Group had argued that its slot machines operated in the same way as, and were viewed by consumers as similar to, fixed odds betting terminals (FOBTs), which were exempt from VAT at the relevant period. Fiscal neutrality rules require that VAT be equally applied to similar goods and services.

VAT expert Suzanne McMahon of Pinsent Masons, the law firm behind Out-Law.com, said that the Court of Appeal's decision had turned on a new argument by HMRC; that FOBTs should always have been taxed and that there was therefore no 'exempt comparator' to Rank's taxable machines. The Tax Tribunal and High Court had previously found in favour of Rank, while a referral to the Court of Justice of the European Union (CJEU) on the fiscal neutrality points broadly agreed with the company's arguments.

"This argument wasn't raised at the time the VAT claims were made by the industry – it only came into issue as a defence to the arguments put forward by the gaming industry," McMahon said. "The Court of Appeal has agreed with HMRC's arguments, which were not considered by the CJEU, and stated that Rank cannot argue that its machines are similar to exempt machines because those machines should have in fact always been taxable based on the intended effect and purposes of the gaming legislation."

This issue could continue for some time and might create uncertainty for many businesses seeking to realise value from such claims.

Following the High Court's decision in favour of Rank in 2009, HMRC repaid claims for overpaid VAT relating to the contested period, McMahon said. Where protective assessments had been issued by HMRC in relation to these amounts, HMRC could seek to enforce them following the Court of Appeal's decision. A related Tribunal case, dealing with whether FOBTs are similar to gaming machines governed by Part III of the Gaming Act, was held over until the Court of Appeal's decision was published and would "now be stayed until the decision in any further appeal", McMahon said.

The EU's fiscal neutrality laws mean that supplies of goods and services that are the same or similar must be treated in the same way for tax purposes to avoid any distortion of competition. In 2011, the CJEU held that as long as supplies were identical or similar from the viewpoint of the player, it was irrelevant whether the difference in VAT treatment between the different games actually affected competition.

The case was in relation to income raised by the machines between 1 October 2002 and 5 December 2005. At that time, income from machines where "the element of chance in the game is provided by means of the machine" was taxable, under Part III of the 1968 Gaming Act. Income from the comparable machines, governed by section 16 of the 1976 Amusements Act and section 21 of the Gaming Act, were exempt from VAT. The distinction between the two types of machine for VAT purposes, which hinged on whether the element of chance in the game was controlled by the machine, ended on 6 December 2005.

As part of its submissions to the Court of Appeal, HMRC argued that the legislation as enacted was not designed to distinguish between different types of machine. Instead, it was designed to distinguish between "more transparent" games featuring a human agent, and "an industry in which the machines enabled gaming to take place without any such human participation". In his leading judgment, Lord Justice Rimer agreed.

"The control that Part III sought to impose was on the availability for use by the public of mechanical equipment providing the opportunity for playing of games of chance when the element of chance was provided by the equipment so used," he said. "It cannot have been the purpose of Part III to confine its control to equipment comprised in a self-contained single unit or terminal and to exclude from such control two separate, but linked, items of equipment that together perform an identical function... In my view, to interpret Part III in such a narrow, literal way would be absurd."

VAT should therefore have been payable on both types of machine at the relevant time, the judge said. This meant that the need for fiscal neutrality was irrelevant.