On 10th November 2011, the Court of Justice of the European Union (“CJEU”) delivered its keenly anticipated judgment in HMRC v Rank, in which it gave preliminary rulings on questions referred by both the Upper Tribunal and the Court of Appeal. The judgment is significant both in terms of the clarification it provides on the EU principle of fiscal neutrality and in terms of the practical consequences of the ruling, since Rank’s multi-million pound claim is a test case for the gaming industry.
The context of the rulings is a series of claims by the Rank Group plc (“Rank”) for VAT allegedly overpaid on supplies of bingo and slot machine gaming. In essence, Rank alleges that the UK has breached EU law by treating similar supplies differently for VAT purposes, in that certain forms of bingo and slot machine games have been subject to VAT, while other forms of the same games have been exempt from VAT, despite the fact that the exempt and taxable forms of each game are similar from the point of view of the average consumer. HMRC have raised a number of defences to the claims, including a due diligence defence, and an argument that any difference in VAT treatment between similar games did not distort competition, an argument that certain comparators relied on by Rank were in fact not similar to its machines, and that it was only differences of legal treatment that could found a case for breach of the principle of fiscal neutrality: a practice by HMRC of treating supplies differently would not suffice.
In its ruling, the CJEU has clarified the scope for claims by taxpayers based on a breach of fiscal neutrality and on the availability of defences by Member States to such claims:
1. First, the CJEU ruled that a difference in VAT treatment of two supplies of services which are identical or similar from the point of view of the consumer and meet the same needs of the consumer is sufficient to establish an infringement of the principle of fiscal neutrality. Such an infringement does not require that there also be established an actual existence of competition between the services in question or a distortion of competition because of the difference in VAT treatment.
2. Secondly, the CJEU stated that where there is a difference in VAT treatment of two games of chance, for the purpose of fiscal neutrality no account should be taken of the fact that those two games fall into different licensing categories and are subject to different legal regimes relating to control and regulation.
3. Thirdly, on the issue of how to assess alleged similarity of supplies, the CJEU stated that an assessment of whether games are similar must be made from the point of view of “the average consumer” and must take account of the “relevant or significant evidence liable to have a considerable influence” on his decision to play one game or the other.
4. The CJEU’s fourth ruling clarified that a taxable person cannot demand that a certain supply be given the same tax treatment as another supply, where such treatment does not comply with the relevant national legislation. The principle of equal treatment must be reconciled with the principle of legality, according to which a person may not rely, in support of his claim, on an unlawful act committed in favour of a third party.
5. Finally, the CJEU ruled that a Member State may not rely on a due diligence defence to contest a claim for reimbursement of VAT based on a breach of the principle of fiscal neutrality, in circumstances where it has exercised its discretion to exclude from exemption a category of machines meeting certain criteria.
The Rank Group plc was represented by Paul Lasok QC and Valentina Sloane
HMRC were represented by Christopher Vajda QC and George Peretz