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UK Supreme Court upholds HMRC's position in gaming machine VAT case

The element of chance in a computerised slot machine connected to a separate random number generator (RNG) was still "provided by means of the machine" for the purposes of VAT legislation, meaning that the takings from that machine were subject to VAT, the UK's highest court has confirmed.

In a unanimous judgment, the Supreme Court said that what was relevant was how the element of chance was provided "in the game", rather than the physical identity of the equipment. The taxpayer and owner of the machines, Rank Group, had tried to argue that by treating the RNG and the various terminals connected to it as one and the same, HM Revenue and Customs (HMRC) was acting inconsistently with separate rules limiting the number of 'machines' in any one location.

Speaking for the court, Lord Carnwath said that it was "not necessary to resolve that debate".

"The emphasis is not so much on the physical nature of the equipment or its parts, as on the functions they are performing together for the purpose of a particular type of work," he said. "In the present context, the overall purpose or task is the creation for a game of chance for the player, in which purpose both the terminal and the RNG play, and are designed to play, essential and connected functions."

"[O]ne can arrive at the same practical answer as the Court of Appeal, without departing from the view that the word 'machine', where it matters, can refer to an individual terminal. The relevant phrase is 'the element of chance in the game is provided by means of the machine' ... Chance is the possibility of something happening, not in the abstract, but for a particular player in the context of a particular game," he said.

The case related to takings from the slot machines between 1 October 2002 and 5 December 2005. The VAT rules at the relevant time applied to "gaming machines"; defined as machines "constructed or adapted for playing a game of chance" which players paid to play, with the element of chance in the game "provided by means of the machine".

The machines in dispute were computerised, with payments made according to whether symbols on them matched when they stopped. The position that the symbols came to rest in were chosen by the RNG. A single, centralised RNG in each location controlled up to six playing terminals. The VAT and Duties Tribunal and the High Court both found that because the RNG was not part of any of the terminals, the element of chance was not "provided by means of the machine".

In 2013, the Court of Appeal overturned the High Court's decision and ruled in favour of HMRC. Lord Justice Rimer ruled that a "narrow, literal" construction of the final condition would lead to "absurdity". He also dismissed arguments by Rank that EU fiscal neutrality rules required the machines to be taxed in the same way as fixed odds betting terminals, the takings from which were exempt from VAT during the relevant time period.

Darren Mellor-Clark, an expert on VAT and indirect taxes at Pinsent Masons, the law firm behind Out-Law.com, said that the Supreme Court's decision would be a "disappointing setback" for Rank and other gaming machine operators.

"It is, however, unlikely to be the end of the story as there are a number of other claims by Rank, and other operators, in regard to similar situations currently awaiting litigation," he said.

"It is interesting to note that their Lordships did not feel it necessary to allow the fiscal neutrality 'stalking horse' a run out of the stables on this occasion. The Supreme Court found that a decision could be reached on the basis of ordinary statutory construction. Perhaps we shall see the return of fiscal neutrality to this arena as the further matters are litigated," he said.

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