Rank Group: fiscal neutrality case remitted to the First Tier Tribunal

Stephen Hignett, Tax Partner, CMS

In recent years the Rank Group (“Rank”) has been litigating several VAT claims based on “fiscal neutrality” arguments.  There have been many twists and turns in this litigation and the claims have proceeded through the courts in three separate strands.

Each of these strands is concerned with a comparison of two types of gambling machine which have been afforded different VAT treatment but, as Rank has argued, are so similar they should be afforded the same VAT treatment.  By championing this “fiscal neutrality” argument (fiscal neutrality being the EU law principle that similar services must be afforded the same VAT treatment) and comparing machines on which the UK has imposed VAT with similar machines which the UK has treated as VAT exempt, Rank has been able to claim repayment of the VAT on the former where it has been able to show that the services supplied by these machines are sufficiently “similar”.

To date, Rank has been successful.  The three strands of litigation break down as follows.

  • The first relates to “similar” types of mechanised cash bingo that were afforded different VAT treatment.
  • The second relates to “similar” slot machines which, depending on their treatment under the Gaming Act 1968, were afforded different VAT treatment.

In both of these strands of litigation, Rank won in both the First-Tier Tribunal (the “FTT”) and in the High Court (following an appeal against the FTT’s decision by HMRC).  HMRC was then granted permission to appeal to the Court of Appeal (the “CA”).  However, prior to the CA hearing, the CA referred certain questions to the European Court of Justice (the “ECJ”) and, following the ECJ ruling on these questions, HMRC effectively threw in its hand, with Rank securing the repayment of the VAT previously paid in respect of the machines in question.

The third strand of litigation compares the VAT treatment of “Traditional Gaming Machines” (where the random number generator is located inside the machine) and Fixed-Odds Betting Terminals (where the random number generator is located outside the machine in another location) (“FOBTs”).  During the period in issue (1 October 2002 to 5 December 2005), Traditional Gaming Machines were subject to VAT whereas FOBTs were VAT exempt.  Rank’s case in this third strand is the lead case for a considerable number of claims for the repayment of VAT levied on Traditional Gaming Machines.  Collectively these claims are thought to be worth several hundred million pounds.    

This third strand of litigation has taken a slightly different route through the courts than the other strands.  First, Rank won in the FTT and HMRC was given permission to appeal to the Upper Tribunal (the “UT”).  However, before the case was heard in the UT, the UT referred certain questions to the ECJ seeking guidance on how to determine whether the services supplied by Traditional Gaming Machines and FOBTs are “similar”.

Following the ECJ’s ruling, the UT decided that the FTT had erred in law by applying an incorrect test and failing to take into account the correct considerations when determining whether or not the services offered to consumers by Traditional Gaming Machines and FOBTs are similar.  The UT has therefore referred the matter back to the FTT to be reconsidered by that tribunal in the light of the ECJ’s guidance.

More specifically, the UT decided that the FTT erred by (i) ignoring the differences between Traditional Gaming Machines and FOBTs relating to permitted stakes, prize limits and available betting patterns; and (ii) failing to apply a test of “similarity” based on examining the features of the two types of machines which were likely influence consumers’ decisions to play one type of machine or the other.  All eyes will now be on the FTT to see whether it reaches a different conclusion on the similarity of Traditional Gaming Machines and FOBTs when applying the test prescribed by the ECJ.

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