Commissioners for Her Majesty’s Revenue and Customs v The Rank Group Plc

For VAT purposes, an element of chance is provided “by means of” a gaming terminal where the player’s operation of the terminal actively determines the winning or losing combination. The terminal does more than communicate information generated elsewhere.

A random number generator may therefore serve several terminals and be separately housed and powered. Its location does not prevent each terminal from providing the element of chance where pressing the terminal’s button interrupts the generator’s rapidly changing sequence and determines the outcome. The equipment may also be viewed functionally: linked components designed and supplied to perform the essential functions of gaming can constitute a composite machine.

The appeal concerned VAT charged on Rank’s takings from multi-terminal slot-machine systems between 1 October 2002 and 5 December 2005. Each terminal was connected to a separate random number generator which served several terminals. Rank claimed repayment on the basis that the terminals were not “gaming machines” within Note (3) to the relevant betting, gaming and lotteries exemption.

The VAT and Duties Tribunal and Norris J held that the takings were exempt because the external generator, rather than the terminal containing the payment slot, provided the element of chance. The Court of Appeal, in [2013] EWCA Civ 1289, reversed that conclusion.

The central issue was whether the element of chance in each game was “provided by means of the machine” when a remote generator supplied random numbers to several playing terminals.

Lord Carnwath, with whom Lord Neuberger, Lord Reed, Lord Toulson and Lord Hodge agreed, dismissed the appeal.

1. The words “by means of the machine” required the machine to perform an active function in the game. Mere communication to the player of information generated elsewhere would not suffice. The relevant question concerned how the element of chance was provided in the particular game.

2. The sole issue was the construction of the VAT legislation. Although the critical expression derived from the Gaming Act 1968, the VAT draftsman had adopted only some elements of that Act’s definition. It could not be assumed that both statutory regimes were intended to produce precisely the same results. Comparisons with regulatory treatment under the 1968 Act therefore provided little assistance.

3. As a matter of ordinary language, “machine” need not be confined to one physical item. Its meaning may emphasise the functions performed collectively by its parts. A terminal and random number generator, designed and supplied for use together and each performing an essential connected function, could accordingly be regarded as a composite machine. The same reasoning was capable of applying where one generator served several terminals.

4. It was unnecessary finally to resolve whether the composite system was the relevant machine. The statutory condition was satisfied even if each terminal was considered separately. The player’s pressing of a button or pulling of a lever interrupted the generator’s rapidly changing, pre-programmed sequence at a particular moment. That act determined the winning or losing combination. The terminal therefore performed an active role in generating the result rather than passively transmitting information.

5. The remote generator’s response was automatic, and its physical location was immaterial. The element of chance was provided by means of the terminal, consistently with the statutory language and the policy of treating functionally similar gaming equipment alike. The disputed takings were therefore taxable. The Court of Appeal’s conclusion was affirmed, although on somewhat different reasoning.

1. United Kingdom Supreme Court: The appeal was dismissed unanimously. The conclusion of the Court of Appeal was affirmed, although for somewhat different reasons.
2. Court of Appeal: In [2013] EWCA Civ 1289, the court held in favour of HMRC. It treated the connected terminals and random number generator as a machine and reversed the decisions below.
3. High Court: Norris J agreed with the tribunal that a random number generated in a separate unit serving several terminals was an external event, so the terminals were not gaming machines within the relevant definition.
4. VAT and Duties Tribunal: The tribunal held that the multi-terminal products were exempt because the separate random number generator was not part of any terminal and the element of chance was not provided by the machine containing the payment slot.