The latest hearing in the long running Rank case has recently progressed through the Court of Appeal. This case first came to the attention of most smaller operators in 2006 and relates to one of several cases Rank is currently involved in, known as ‘slots 1’.
The basic premise of the dispute is that between October 2002 and December 2005 income from certain slot machines (referred to in the appeal as ‘disputed machines’) was treated as VAT exempt because the machines had a remote Random Number Generator (RNG) and the VAT legislation stated that supplies were subject to VAT where ‘the element of chance is provided by means of the machine’. This was interpreted as meaning that if the RNG was in the machine income from that machine was subject to VAT. However, where it was not the income was VAT exempt. A change to the law in 2005 removed this distinction and income from all machines became taxable. However, Rank and many others argued that in the period where machines were treated differently there was a breach of fiscal neutrality and claims were submitted to recover VAT paid, many of which have since been repaid.
In this most recent hearing HMRC changed tactics and put forward the argument that the ‘disputed machines’ were wrongly categorised for VAT purposes, and in fact both types of machines should have been treated as taxable. The fact that the RNG was separate from the machine in a physical sense did not mean that the element of chance was not provided by the machine.
The court was persuaded by this argument because a literal interpretation made it easy for taxpayers to easily avoid tax (by removing the RNG from the machine). The court was therefore prepared to adopt a purposive interpretation of the legislation.
It seems likely that Rank will appeal this decision to the Supreme Court and this case will rumble on for some considerable time yet. However, HMRC has issued a Brief, which indicates that it will try to recover sums repaid to gaming machine operators.