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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> HM Revenue and Customs v The Rank Group Plc [2013] EWCA Civ 1289 (30 October 2013) URL: https://www.bailii.org/ew/cases/EWCA/Civ/2013/1289.html Cite as: [2013] BVC 526, [2013] EWCA Civ 1289, [2013] STI 3396, [2014] STC 470 |
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ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Mr Justice Norris
Strand, London, WC2A 2LL |
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B e f o r e :
LORD JUSTICE BEATSON
and
LORD JUSTICE FLOYD
____________________
THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS |
Appellants |
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- and - |
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THE RANK GROUP PLC |
Respondent |
____________________
WordWave International Limited
A Merrill Communications Company
165 Fleet Street, London EC4A 2DY
Tel No: 020 7404 1400, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Mr Paul Lasok QC and Ms Valentina Sloane (instructed by Forbes Hall LLP) for the Respondent
____________________
Crown Copyright ©
Lord Justice Rimer :
Introduction
Outline of the litigation
The Gaming Act 1968
'26. (1) This part of this Act applies to any machine which
(a) is constructed or adapted for playing a game of chance by means of the machine, and
(b) has a slot or other aperture for the insertion of money or money's worth in the form of cash or tokens.
(2) In the preceding subsection the reference to playing a game of chance by means of a machine includes playing a game of chance partly by means of a machine and partly by other means if (but only if) the element of chance in the game is provided by means of the machine.'
The VAT treatment of slot machines
The position from 1973 to 1975
'Item No.
1. The provision of any facilities for the placing of bets or the playing of any games of chance.
2. The granting of a right to take part in a lottery.
Notes :
(1) Item 1 does not include
(a) admission to any premises; or
(b) the granting of a right to take part in a game in respect of which a charge may be made by virtue of regulations under section 14 of the Gambling Act 1968; or
(c) the provision by a club of such facilities to its members as are available to them on payment of their subscription but without further charge
(2) "Game of chance" has the same meaning as in the Gaming Act 1968.
(3) "Lottery" includes any competition for prizes which is authorised by a licence under the Pool Competitions Act 1971.'
The effect of that provision was to exempt from VAT the takings of all machines used for gaming.
The VAT position between 1973 and 2005
'(4) "Gaming machine" means a machine in respect of which the following conditions are satisfied, namely
(a) it is constructed or adapted for playing a game of chance by means of it; and
(b) a player pays to play the machine (except where he has an opportunity to play payment-free as the result of having previously played successfully), either by inserting a coin or token into the machine or in some other way; and
(c) the element of chance in the game is provided by means of the machine.'
The effect of that change, by way of an added exclusion from the exemption, was to bring the takings from 'gaming machines' as defined within the scope of VAT. Although I have referred to the case as being about 'slot machines', it is to be noted that the payment to use the machine did not have to be by way of the insertion of money or a token into a slot or aperture, a difference from the criteria for a 'machine' within the meaning of Part III of the Gaming Act.
The nature of the change effected by the 1975 Order
'I expect that everybody knows ordinary bingo. It is played at bazaars, sales of work [sic: in [1976] 1 All ER 273, at 279c, the phrase is 'places of work'], and so forth, for small prizes and is perfectly lawful. Now prize bingo is like ordinary bingo, but played with sophisticated apparatus. Instead of cards with numbers on them, there are dials facing the players. A player puts in a coin (5p for two cards). Thereupon two dials light up showing numbers corresponding to two cards. When the game starts, instead of someone drawing a number out of a hat, a machine throws a ball into the air. A gaily dressed lady plucks one of them and calls out the number. If it is one of the numbers on the dial, the player crosses it out by pulling a cover over it. If he gets all his numbers crossed out correctly before the other players, he gets a prize. This is obviously a lottery or a game of chance, but it is not a "gaming machine" because the element of chance is not "provided by means of the machine" but means of the gay lady: see section 26(2) of the Gaming Act 1968.
In some of these premises there are also some "one-armed bandits." These are gaming machines. The player puts in a coin. This enables him to pull a handle to forecast a result. Cylinders revolve and give an answer. If he succeeds, he gets the winnings. If he fails, he loses his money. This is undoubtedly a "gaming machine" because the element of chance is provided by means of a machine: see section 26(1) of the Act of 1968 and Capper v. Baldwin [1965] 2 QB 53.'
The Lotteries and Amusements Act 1976
The issue
The facts
'14 Modern slot machines are computerised, so that the odds are whatever they are programmed to be. In modern slot machines, the reels and lever are present for historical and entertainment reasons only. The positions the reels will come to rest on are chosen by an embedded RNG contained within the machine's software.
15. The RNG is constantly generating random numbers, at a rate of hundreds or maybe thousands per second. As soon as the lever is pulled or the "Play" button is pressed, the most recent random number is used to determine the result. This means that the result varies depending on exactly when the game is played. A fraction of a second earlier or later, and the result would be different.
16. Most RNGs will eventually repeat their number sequence after many millions of numbers. The RNG is a function which is contained in the software.'
Category 1
'23. A further variant was that some machines had the RNG hanging by a wire from the terminal but outside the terminal so that it was not touching the terminal. Other variants were that the RNG was velcroed to the wall directly behind the machine or screwed to the wall. It appeared that some users had unscrewed the machines and extracted the RNGs which had been supplied inside the machines; there was no suggestion that Rank had done this.'
The tribunal's view was that systems of this nature were Part III machines. Rank does not challenge that view. The appeal is not directed at the correct characterisation of such systems.
Category 2
' An Astra product shown at a trade show in October 2004 had an RNG contained in a separate plinth on which the machine itself stood. It appears that a wire linked the RNG to the terminal passing through a hole in the bottom of the terminal cabinet. The RNG had its own separate power supply. The cables were detachable with a plug for the cable.'
Category 3
Type 3(a)
Type 3(b)
Category 3(c)
Further evidence
HMRC's prior and present positions
'12.4.2 Fixed Odds Betting Terminals (FOBTs) and Section 16 and 21 Gaming Terminals
FOBTs look like traditional gaming machines and can be played for cash. They allow a variety of simulated games to be played on them including roulette, virtual horse and dog racing, gold and number games. A central feature of their operation is that the terminal is connected to a remote server, which contains a random number generator (RNG). It is this RNG that creates the chance element of the games. The FOBT itself contains the visualisation software. They are located at bookmaker's premises.
Section 16 and Section 21 terminals are similar to bookmakers FOBTs. They offer games of chance, usually roulette-based games, and again are driven by a remotely sited, random number generator. They have a minimum stake of 50p, a maximum cash prize of £25 and can also offer non-cash prizes. In bingo clubs, the non-cash prizes are being provided under the terms of The Lotteries and Amusements Act 1976 and the Gaming Act 1968. Under this social law, it is only premises that hold appropriate permits that are allowed to provide these gaming facilities.
Because the element of chance is not provided by the terminals themselves, but by a RNG which is outside the machine, both bookmaker's FOBTs and Section 16 and Section 21 terminals cannot be treated as gaming machines. Consequently, if the terminals offer the facilities for the placing of bets or for playing any games of chance, they will be exempt from VAT under Schedule 9, Group 4, Item 1 of the VAT Act 1994.'
Slots 2
The reasoning of the tribunal in Slots 1
'45. We have no doubt on the evidence that RNGs were connected to a number of gaming machine terminals from November 2003 at the latest and were accepted by the Gaming Board as coming within section 21 of the Gaming Act 1968.
46. We accept that in determining whether on a correct interpretation these were gaming machines within Note (3), the views of the Gaming Board as to whether they came within section 21 are not relevant.
48. It is not in dispute that in respect of all the potential comparators, whether multi-terminal or single terminal, the element of chance was provided by the RNG. In the case of slot machines it is clear that "the machine" to which Note (3)(b) refers was the terminal into which the coins or tokens were inserted. If the conditions in (b) and (c) were both to be satisfied both the terminal and the RNG had to refer to the same machine. The use of the definite article before the word "machine" in (b) and (c) makes this clear. Indeed condition (a) had to be satisfied also. Where the RNG was situated inside the terminal so as to be an integral part of it, we have no doubt that the RNG and the terminal formed part of a single machine.
49. Mr Vajda's case [he was leading counsel for HMRC] was that where a number of terminals were connected to a single RNG together they comprised a single machine in respect of which all the conditions in Note (3) were satisfied. That was not quite how he put it, however, we did not understand him to submit that the Megaslot terminals to which he referred would not have been a single machine if one or more of the terminals had been added later.
50. It does not seem to us that the point is capable of much more elaboration. In our judgment Dr Lasok [leading counsel for Rank] was correct in submitting that the definition of gaming machine was directed to individual machines rather than to systems. The machines were clearly the terminals containing the slots. If the machine in question contained the RNG as an integral part, condition (c) was satisfied. If the RNG was not an integral part of the machine, condition (c) was not satisfied.
51. We accept Dr Lasok's submission that the controls under Part III of the Gaming Act 1968 as to the number of gaming machines in a premises would have been defeated in relation to multi-terminal products if a number of terminals linked to one RNG only comprised a single gaming machine. However, those controls were also ineffective if terminals with remote RNGs were not gaming machines at all within Part III.
53. As already pointed out "the machine" in Note (3) was clearly the terminal into which a coin or token was inserted. The RNG provided the element of chance. Note (3) was satisfied where the RNG was part of the "machine." Where the RNG was situated outside the terminal and served a number of terminals we conclude that the terminals were not "gaming machines" because the RNG was not part of any terminal and the element of chance was not provided by means of the machine containing the slot. We do not consider that the language of Note (3) was apt to cover a series of terminals linked to one RNG. The result is that by reason of Note (1)(d) to Group 4 the provision of gaming facilities by multi-terminal products was exempt as a matter of law.'
The reasoning of Norris J on the Slots 1 appeal
'67. In my judgment the tribunal adopted the correct approach. In the phrase "the element of chance in the game is provided by means of the machine" the "machine" to which reference is made is obviously that which is constructed for playing the game of chance, that which the player plays and that into which a coin or token is inserted (reading the note to Group 4 consistently with s. 26 of the Gaming Act 1968). Nobody argued that the resolution to the problem of the multi-terminal system utilising a single RNG lay in the words "by means of" and there was no examination of how the remotely generated number came to determine the outcome of the game played on the terminal. The argument proceeded on the footing that the element of chance had to be provided by "the machine" and the problem lay in identifying "the machine". The "element of chance" is the determining event which governs the outcome of the game being played on the machine which has the slot in it and which the player is playing. Where the determining event is a random number there is I think no difference in principle between a human being selecting a numbered ball, an electric ball shuffler (such as that used in the National Lottery) producing a numbered ball or a microprocessor emitting a stream of numbers. It is a question of fact in each case whether that determining event is produced by "the machine", and fine distinctions might have to be drawn. In my judgment the principle by reference to which those judgments have to be made is whether the outcome of the game may sensibly be regarded as determined by an external event which the machine records or is produced by the machine itself. Like the tribunal I would hold that the random generation of a number in a separate unit which serves various player terminals (which may themselves be running different games) is properly regarded as an external event and not one produced by the machine that the player is playing. Like the tribunal I do not think it is possible to elaborate further.
68. In the result I hold that there is no legal definition of the word "machine" which compelled the tribunal, on the evidence which was before it, to conclude as a matter of fact that the element of chance in the game was always provided "by means of the machine."
69. Once it is held that there are games of chance played on "gaming machines" (the supply of which is subject to VAT) and there are games of chance played on machines that are not "gaming machines" (which are not subject to VAT), it is apparent that a breach of the principle of fiscal neutrality may have occurred. Applying the principles outlined above I would again hold that there was such a breach. Games played on such terminals were interchangeable. The "similarity" test is undoubtedly satisfied. At a conceptual level (by reference to the activity as such) the games were undoubtedly in competition with each other. The supply and the consideration for the supply were exactly the same; but the differing VAT treatment led to a different financial outcome for the economic operator, and that again suffices to distort competition. There is again no discernible justification (in terms of the implementation of the Sixth Directive and the adoption of a common system of VAT) for the differing tax treatment.'
The appeal
'For the purposes of the Value Added Tax Act 1994, as it stood during the relevant period, in the phrase "if the element of chance is provided by means of the machine" (in Note (3) to Group 4 of Schedule 9), the "machine" is to be regarded as constituting all the apparatus of which the playing terminal forms part, that is to say both the terminal and any equipment linked to the terminal (including, for the avoidance of doubt, linked by means of a cable) and which is intended and designed to be used with that terminal for the purposes of playing a game.
We justify that proposition on two main grounds: that that is a fair reading of what is meant by "apparatus" (so it is a faithful application of the language used by Parliament); and that is consonant with the purpose of the Gaming Act 1968'.
'Thus important provisions were included in Part III whereby, first, those who intended to sell, supply or maintain machines constructed or adapted for playing a game of chance had to obtain a certificate from the Gaming Board entitling them to do so and, second, a general power was given to the Secretary of State to impose such terms and conditions as he might consider necessary or expedient with regard to the sale, supply or maintenance of such machines and, subject to certain exceptions, profit-sharing agreements (in the widest sense) were expressly prohibited.'
'In interpreting an Act of Parliament it is proper, and indeed necessary, to have regard to the state of affairs existing, and known by Parliament to be existing, at the time. It is a fair presumption that Parliament's policy or intention is directed to that state of affairs. Leaving aside cases of omission by inadvertence, this being not such a case, when a new state of affairs, or a fresh start bearing on policy, comes into existence, the courts have to consider whether they fall within the parliamentary intention. They may be held to do so, if they fall within the same genus of facts as those to which the expressed policy has been formulated. They may also be held to do so if there can be detected a clear purpose in the legislation which can only be fulfilled if the extension is made. How liberally these principles may be applied must depend upon the nature of the enactment, and the strictness or otherwise of the words in which it has been expressed. The courts should be less willing to extend expressed meanings if it is clear that the Act in question was designed to be restrictive or circumscribed in its operation rather than liberal or permissive. They will be much less willing to do so where the subject matter is different in kind or dimension from that for which the legislation was passed. In any event there is one course which the courts cannot take, under the law of this country; they cannot fill gaps; they cannot by asking the question "What would Parliament have done in the current case not being one in contemplation if the facts had been before it?' attempt themselves to supply the answer, if the answer is not to be found in the terms of the Act itself.'
'Before applying an "always speaking" construction to a penal statutory provision in order to take account of developments which have taken place since the provision was enacted, the court must, in my judgment, be very clear that the new situation to which the provision is to be applied is within the mischief at which the provision was aimed. It must be very clear that the new situation falls within the parliamentary intention.'
Chadwick LJ made comments to like effect, at paragraph 36.
Discussion and conclusion
Lord Justice Beatson :
Lord Justice Floyd :