Supreme Court dismisses Rank’s appeal in gaming machine VAT case

08 Jul 2015

In a judgment released this morning, the Supreme Court dismissed Rank’s appeal against an earlier ruling by the Court of Appeal.  Estimates given to the Court were that the amount of tax at stake (as a result of Rank’s claim and parallel claims) was between £1 billion and £2 billion.

The issue on the appeal was whether certain gaming machines (“disputed machines”) were, in the period before 2005, subject to VAT.  Rank argued that they were not.

Earlier judgments in the case, including a judgment of the Court of Justice of the EU held that if the disputed machines were not taxable, then Rank had a good claim that there was a breach of the principle of fiscal neutrality, since similar machines operated by it (“Part III machines”)  were subject to VAT under the UK VAT rules as they then stood.  On that basis, it would be entitled under EU law to a refund of all the VAT paid on its Part III gaming machines during the period when the disputed machines were in operation (according to Rank, since the 1970s).

So Rank’s claim for a refund turned on whether it was right to say that the disputed machines were not taxable.  In the VAT Tribunal and High Court, Rank succeeded: those courts agreed that, because the relevant test for taxability was whether the “element of chance in the game is provided by means of the machine”, and because the systems at issue involved a terminal connected by a wire to a remote electronic random number generator (“RNG”), the numbers generated by which determined the result of the game and which those courts considered not to be part of the same machine as the terminal, the test was not satisfied and the disputed machines were not taxable.

However, in November 2013 the Court of Appeal upheld HMRC’s appeal on that point.  The Court of Appeal held that the disputed machines were taxable.  That was because the definition of “machine” should be interpreted so that the RNG, and terminals connected to the RNG, all counted as one machine.

The Supreme Court has now dismissed Rank’s appeal against that judgment, though it adopted a slightly different approach to that of the Court of Appeal: it held that, as a matter of ordinary principles of statutory construction, for the purposes of the provision at issue the element of chance was provided by the exact time when the player pushed the relevant button on the terminal, since the exact time would determine which number was “read off” the RNG.  The element of chance was therefore provided by the terminal itself, so that the statutory test was satisfied.  It therefore did not need to consider HMRC’s alternative submission that, in order to avoid a breach of the principle of fiscal neutrality, the relevant provision had as a matter of EU law to be interpreted so as to bring the disputed machines into tax.

Rank’s and other operators’ claims based on an alleged difference of treatment between Part III machines and disputed machines have therefore failed.  However, a number of other claims by Rank and other operators in the gaming industry for repayment of VAT as a result of alleged breaches of the principle of fiscal neutrality remain to be litigated.

Paul Lasok QC and Valentina Sloane acted for Rank; George Peretz QC and Laura Elizabeth John acted for HMRC.