Rank Group Ltd v Revenue & Customs

Factual and Procedural Background

This appeal concerns the application of VAT on slot machines in the United Kingdom prior to 6 December 2005. The central issue was whether the taxation of certain gaming machines not covered by specific statutory exemptions (section 21 of the Gaming Act 1968 or section 16 of the Lotteries and Amusements Act 1976) while similar machines covered by those sections were exempt infringed the principle of fiscal neutrality under Community Law.

The Appellant ("Company A") sought repayment of VAT paid on income from gaming machines operated by it, arguing that similar machines operated by others had been exempt, resulting in unequal VAT treatment. The Respondents ("The Revenue") refused the repayment claim. The appeal also involved a wider context where approximately 1,100 other appeals by traders were stayed pending the outcome of this case.

The dispute hinged on whether certain comparator machines were exempt as a matter of law or treated as exempt in practice by The Revenue, and on the correct interpretation of the statutory definition of "gaming machine" under VAT law and the Gaming Act. The case involved examination of the technical configuration of machines, particularly the role and location of random number generators ("RNGs").

The Tribunal heard evidence from multiple witnesses including industry experts, company representatives, and officials from The Revenue and the Gaming Board. The hearing addressed both factual and legal questions related to VAT liability, the principle of fiscal neutrality, and possible defences raised by The Revenue.

Legal Issues Presented

1. Whether the taxation of certain gaming machines not covered by statutory exemptions infringed the principle of fiscal neutrality under Community Law.
2. Whether comparator machines were exempt from VAT as a matter of law or treated as exempt in practice by The Revenue.
3. How the definition of "gaming machine" in VAT legislation and the Gaming Act should be interpreted, particularly in relation to the location and integration of RNGs.
4. Whether any disparity in VAT treatment was immaterial due to factors such as the short period of exemption or due diligence by the United Kingdom in remedying any disparity.
5. Whether a defence of reasonable diligence or objective justification is available to The Revenue in respect of the alleged breach of fiscal neutrality.

Arguments of the Parties

Appellant's Arguments

• The statutory definition of "gaming machine" draws a distinction between individual machines and systems or combinations of machines; the RNG is distinct from the terminal and should not be treated as part of the machine where it is remote.
• Multi-terminal configurations linked to a single RNG should be treated as separate machines for VAT purposes, and thus exempt if the RNG is not integral.
• The different VAT treatment of similar machines breached the principle of fiscal neutrality.
• Even if the comparator machines were taxable in law, they were treated as exempt in practice by The Revenue, which itself breached fiscal neutrality.
• There is no valid defence of reasonable diligence or short period defence available to The Revenue under Community Law.
• The disparity in VAT treatment impacted all operators objectively, regardless of their reasons for using exempt machines.

Respondents' Arguments

• No sufficient disparity in tax treatment existed between machines covered by sections 16, 21 and those covered by sections 31 and 34 of the Gaming Act.
• The comparator machines were not exempt as a matter of law; if any were, they had limited commercial use for a short period, thus no breach of fiscal neutrality arose.
• The United Kingdom acted with due diligence in amending the law to end any disparity in treatment once aware of it.
• The definition of "gaming machine" should be construed consistently with the social law under the Gaming Act, which includes RNGs as integral parts of the machine even if physically separate.
• Any different VAT treatment was objectively justified and legally certain, and the burden of proof lies on the Appellant to show breach of fiscal neutrality.
• Even if machines were treated as exempt in practice, this was an error that does not negate the principle of fiscal neutrality as The Revenue sought to collect the VAT due.

Table of Precedents Cited

Court's Reasoning and Analysis

The Tribunal began by examining the statutory definition of "gaming machine" under VAT law and the Gaming Act, focusing on the role of the RNG. It concluded that where a single RNG served multiple terminals remotely, the terminals were not gaming machines because the element of chance was not provided by means of the individual machines. Such multi-terminal products were exempt as a matter of law.

Conversely, terminals with dedicated RNGs incorporated within or integral to the machine were gaming machines and taxable. Variations where RNGs were located in plinths or connected by cables but not detachable were considered single machines.

The Tribunal found that The Revenue, in practice, treated terminals linked to remote RNGs as exempt from at least mid-2004, if not earlier. This practical treatment, combined with the legal interpretation, created a prima facie breach of the principle of fiscal neutrality, as similar products were taxed differently.

The Tribunal rejected arguments that the reasons operators used exempt machines or the lack of direct competition between the taxed and exempt machines negated a breach of fiscal neutrality. It emphasized that the principle must be applied objectively and uniformly.

Regarding The Revenue's defence of reasonable diligence in remedying any disparity, the Tribunal acknowledged that such a defence had not been definitively recognized in VAT cases under Community Law but did not exclude its possibility. It decided that further factual evidence was necessary to determine whether The Revenue acted with due diligence to remove the disparity.

The Tribunal also considered the relevance of the short period during which exempt machines were used and concluded that no short period defence was established under Community Law.

Finally, the Tribunal deferred determination of the quantum of any repayment claim and the application of any due diligence defence to a further hearing, pending additional evidence.

Holding and Implications

The Tribunal held that:

• Multi-terminal gaming machines linked to a remote RNG were exempt from VAT as a matter of law prior to 6 December 2005.
• Terminals with dedicated RNGs integral to the machine were taxable gaming machines.
• The Revenue treated certain machines as exempt in practice, creating a prima facie breach of the principle of fiscal neutrality.
• The breach of fiscal neutrality did not depend on the reasons operators used exempt machines or on evidence of competition between taxed and exempt machines.
• The availability of a defence of reasonable diligence by The Revenue remains an open legal question requiring further factual inquiry.

The direct effect of this decision is that The Revenue's refusal of the repayment claim is challenged on grounds of fiscal neutrality breach, with further proceedings necessary to determine the factual matrix and any possible defence. No new precedent was established beyond the application and interpretation of existing principles of fiscal neutrality and VAT law as they apply to gaming machines.