HM Revenue and Customs v The Rank Group Plc

A gaming machine for VAT purposes may comprise more than one physically separate item of equipment. A player terminal and a connected random number generator form a single gaming machine where they are designed and used together to provide the chance element of the game.

This remains so where one remote generator serves several terminals. A narrow construction confined to a single cabinet would permit the VAT charge to be avoided by rearranging equipment without changing its gaming function. Takings from such systems were therefore excluded from the gaming exemption.

Rank sought repayment of VAT paid on the takings of Part III slot machines. Its claim depended on the proposition that comparable multi-terminal systems, in which a remote random number generator served several player terminals, were VAT-exempt. HMRC had formerly treated those systems as exempt but later contended that they were taxable gaming machines.

The VAT and Duties Tribunal upheld Rank’s position, and Norris J dismissed HMRC’s appeals in [2009] EWHC 1244 (Ch). After a preliminary ruling by the Court of Justice of the European Union disposed of the other grounds, only the slot-machine ground remained. The central issue was whether the chance element was provided by means of the machine within Note (3)(c) to Group 4 of Schedule 9 to the Value Added Tax Act 1994.

Appeal allowed. Rimer LJ, with whom Beatson and Floyd LJJ agreed, held that the disputed multi-terminal systems were gaming machines for the relevant VAT provision. Their takings were therefore taxable.

1. The court construed the word machine functionally. Under section 26(2) of the Gaming Act 1968, a terminal and an ancillary random number generator connected to it may together be a machine. Physical separation does not alter that conclusion where the equipment works together automatically to provide the chance element that determines the game’s outcome.

2. The same conclusion applied where the generator was purpose-built and served several terminals. Each terminal could not be used for the game without the linked generator, and the generator was designed to enable that game. The shared character of the generator did not justify treating the system differently. A contrary construction would make the Part III controls effectively optional by permitting operators to remove the generator from the terminal.

3. Although Note (3) to Group 4 of Schedule 9 to the Value Added Tax Act 1994 did not reproduce the definition of machine in section 52 of the Gaming Act 1968, its material criteria were drawn from section 26. It was therefore appropriate to give gaming machine the corresponding practical construction. The tax was directed to equipment meeting those criteria, not to a particular single-cabinet configuration.

4. The tribunal and Norris J had reached the wrong legal characterisation. The court allowed HMRC’s appeal on the sole remaining Slots ground.

• Court of Appeal (Civil Division): Allowed HMRC’s appeal on the remaining slot-machine ground and reversed the conclusion that the multi-terminal systems were VAT-exempt: [2013] EWCA Civ 1289.
• High Court (Chancery Division): Norris J dismissed HMRC’s appeals from the VAT and Duties Tribunal: [2009] EWHC 1244 (Ch); [2009] STC 2304.
• VAT and Duties Tribunal: Allowed Rank’s 2008 appeals concerning its voluntary disclosures, including the Slots appeal.