Revenue and Customs v The Rank Group Plc [2015] UKSC 48

Rank claimed a VAT refund on takings from multi-terminal slot machines linked to a remote random number generator, arguing they were not 'gaming machines' under Note (3). The Supreme Court dismissed the appeal, holding the takings were taxable.

Facts

The appeal concerned whether takings from a particular category of slot machines operated by Rank between 1 October 2002 and 5 December 2005 were subject to VAT or exempt. On 21 December 2005, Rank claimed repayment of more than £25m on the basis that differences in treatment between exempt takings from the disputed machines and taxable takings from similar machines infringed the EU principle of fiscal neutrality.

The disputed machines were all multi-terminal slot machines, in which up to six playing terminals were connected by wire to a single remote random number generator (RNG). The RNG might be housed in a separate box, on a plinth, or hung on a wall, and had its own power supply. Each terminal and its RNG were manufacturer-specific, designed to be sold and used together. Each terminal could operate independently and offer the same or different games.

It was common ground that the disputed machines satisfied paragraphs (a) and (b) of the definition of ‘gaming machine’ in Note (3) to Group 4 of Schedule 5 of the Finance Act 1972 (as amended). The dispute concerned paragraph (c): whether ‘the element of chance in the game is provided by means of the machine’.

Issues

The narrow issue was whether, for the purposes of Note (3)(c), the element of chance in games played on the disputed multi-terminal machines was ‘provided by means of the machine’, given that the RNG generating the random numbers was external to the terminal into which the player inserted coins and on which the game was played.

Arguments

Appellants (Rank)

Rank supported the reasoning of the VAT and Duties Tribunal: the ‘machine’ meant the terminal into which the player inserted coins, and where the RNG was located outside the terminal and served multiple terminals, the element of chance was not provided by means of that machine. The tribunal’s multifactorial assessment should have been respected on appeal. The Court of Appeal was wrong to rely on arguments of absurdity, given HMRC’s previous acceptance of a narrower interpretation. Absent abusive practice, operators were entitled to design their machines in a tax-efficient way.

Respondents (HMRC)

HMRC supported the Court of Appeal’s purposive construction, arguing that ‘machine’ covered a configuration of separate but connected items together enabling the playing of a game of chance at a terminal. They also relied on the principle of neutrality as favouring an interpretation minimising differences in treatment between similar items.

Judgment

Lord Carnwath (with whom Lord Neuberger, Lord Reed, Lord Toulson and Lord Hodge agreed) dismissed the appeal, agreeing with the Court of Appeal’s conclusion but for somewhat different reasons.

Approach to construction

Lord Carnwath rejected the suggestion that ‘by means of the machine’ meant merely the passive communication of information to the player; the definition implied an active function in the game as played. He also considered that limited assistance was derived from comparisons with the Gaming Act 1968 regime, since the VAT draftsman had adopted only some elements of the 1968 Act definition. No convincing policy reason had been suggested for distinguishing between embedded software, a single-terminal RNG, and a multi-terminal RNG.

Meaning of ‘machine’

Standard dictionary definitions (such as ‘an apparatus using or applying mechanical power, having several parts, each with a definite function and together performing certain kinds of work’) indicated no linguistic reason to confine ‘machine’ to a single item. The emphasis was on functions performed together for a particular task. The terminal was useless without the RNG, and a combined set of apparatus designed and supplied for use together could appropriately be treated as a composite machine.

The decisive reasoning

Lord Carnwath held it was unnecessary to resolve the debate about whether ‘machine’ in section 31 of the Gaming Act 1968 referred to terminals or composite systems, because the same practical result could be reached without departing from the view that ‘machine’ could refer to an individual terminal. The element of chance was the determining event for the particular player in the particular game. The pressing of the button or pulling of the lever on the terminal was analogous to rolling a dice: the RNG generated a rapidly changing pre-programmed sequence of numbers, and the player’s action of pressing the button at a particular moment interrupted that sequence to produce the winning or losing combination. The terminal was not merely communicating information from the RNG but was the active means by which the winning or losing combination was generated. It was therefore a fair use of language, and consistent with the policy of the legislation, to describe the element of chance as provided ‘by means of’ the terminal.

Implications

The decision confirms that, for VAT purposes during the relevant period, multi-terminal gaming systems where the RNG was housed separately from the playing terminal nevertheless fell within the definition of ‘gaming machine’ in Note (3) to Group 4, with the consequence that their takings were taxable. The reasoning rests on a functional analysis of how the element of chance is generated in the game: where the player’s action on the terminal is the active means by which the winning or losing combination is generated from the RNG’s sequence, the element of chance is provided ‘by means of’ the terminal, regardless of where the RNG is physically located.

The judgment is significant for operators of gaming equipment, manufacturers, and HMRC, as it forecloses arguments that the takings from such machines could be made exempt by physically separating the RNG from the terminal. The Court treated as relevant, though not decisive, that no convincing policy reason existed for distinguishing between embedded software, a single-terminal RNG, and a multi-terminal RNG. The decision is confined to the construction of Note (3) as it stood during the period in question; Note (3) was amended with effect from 6 December 2005 in a way which placed the taxability of such machines beyond doubt. The Court expressly declined to resolve the wider debate about how ‘machine’ should be understood under section 31 of the Gaming Act 1968.

Verdict: The appeal was dismissed. The takings from the disputed multi-terminal machines were subject to VAT, as the element of chance in the game was provided ‘by means of the machine’ within the meaning of Note (3) to Group 4 of Schedule 5 of the Finance Act 1972 (as amended).

Source: Revenue and Customs v The Rank Group Plc [2015] UKSC 48