Appeal Number LON/2006/875

[2009] UKFTT 363 (TC)

TC00301

Appeal number LON/2006/875

Community Law – Fiscal neutrality – Exemption – Exclusion of provision of “gaming machines” from exemption – Whether taxed machines similar to exempt machines – Relevance of regulatory regime – TNT [2009] STC 1438 considered – Whether FOBTs exempt comparators – Whether on facts due diligence defence established to breach of fiscal neutrality

Exemption- Slot machines – Exclusion of “gaming machines” from exemption – VATA 1994 Sch 9 Group 4 – 6th Directive Art 13B(f) – Breach of fiscal neutrality – Period of breach – Appeal allowed for all periods

FIRST-TIER TRIBUNAL

TAX CHAMBER

THE RANK GROUP PLCAppellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (VAT)Respondents

TRIBUNAL: JUDGE THEODORE WALLACE

A J RING CTA (Fellow)

Sitting in public in London on 5 to 9 and 12 to 15 October 2009

Dr Paul Lasok QC and Valentina Sloane, counsel, instructed by Deloitte LLP, for the Appellant

Christopher Vadja QC, George Peretz and Laura Elizabeth John, counsel, instructed by the Solicitor to the Commissioners for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2009

1

DECISION

1.This is stage 2 of the appeal against the decision to refuse a repayment claim in respect of VAT paid from 1 October 2002 to 5 December 2005 on income from slot machines. This decision concerns the period during which the United Kingdom was in breach of the principle of fiscal neutrality in the taxation of gaming machines and whether the facts for any defence of due diligence in remedying the breach had been established.

2.The claim was in respect of gaming machines known as Jackpots covered by section 31 of the Gaming Act 1968 and gaming machines known as Amusements with Prizes (“AWP”) covered by section 34 of that Act. The claim was for repayment of £29,959,104. The basis of the claim was that the exclusion from exemption of income from gaming machines covered by sections 31 and 34 of the Gaming Act 1968, by reason of Note (1)(d) to Group 4 of Schedule9 to the VAT Act 1994 because of the definition of “gaming machine”, when income from similar machines within section 21 of the Gaming Act 1968 and section 16 of the Lotteries and Amusements Act 1976 were exempt, infringed the principle of fiscal neutrality under Community law. The Appellant also relied on the exemption from VAT of income from Fixed Odds Betting Terminals (“FOBTs”). Article 13B(f) of the Sixth Directive exempted betting, lotteries and other forms of gambling “subject to conditions and limitations laid down by each MemberState.”

3.In Decision No.20777 reported at [2008] V&DR 304 we decided that from November 2003 at the latest United Kingdom law and practice were prima facie in breach of the principle of fiscal neutrality in that similar products were taxed differently. November 2003 was the date when Star City Casino opened using Cadillac Jack machines covered by section 21 of the Gaming Act 1968. In that decision we held over for further evidence the question whether the disparity in treatment extended back over the whole period of the claim.

4.The appeal by the Respondents against that decision was dismissed by Mr Justice Norris in the Chancery Division on 8 June 2009 [2009] STC 2304. On 11 August 2009 the Court of Appeal gave permission to appeal against the decision of Mr Justice Norris.

5.We also held over the questions whether there is a defence to a prima facie breach of fiscal neutrality if it is shown that the United Kingdom acted with due diligence in responding to the development of exempt machines by amending the law to end the disparity in treatment and whether on the facts the United Kingdom had acted with due diligence. These questions which had not been determined by the Tribunal were not covered by the appeal to the Chancery Division.

6.The question as to whether the disparity in treatment extended over the whole period of the claim involves deciding when exempt comparator machines came onto the market. This is not confined to machines operated by the Appellant. Apart from machines covered by section 21 of the Gaming Act 1968 and section 16 of the Lotteries and Amusements Act 1976, which we refer to as “section 16/21 machines”, it involves consideration of whether FOBTs were similar to taxed machines within sections 31 and 34 of the Gaming Act 1968 and were thus relevant comparators. In relation to the period of disparity of treatment,FOBTs are not strictly relevant if section 16/21 machines were on the market at the start of the period of the claim. However, since FOBTs were on the market from 1998, if FOBTs were relevant comparators, then the disparity preceded the period of the claim regardless of the section 16/21 machines.

7.If the FOBTs were relevant comparators, Mr Vadja accepted that the defence of due diligence did not arise on the facts.

8.We were asked by the parties to give a decision on the due diligence issue whether or not we concluded that FOBTs were relevant comparators, since a higher Court may come to a contrary conclusion.

9.A further complication arises as to the relevance of evidence of competition to the question whether and when there were relevant comparators on the market. In our earlier decision we concluded that, since the section 16/21 machines met the same needs of consumers as taxed machines, the disparity in treatment did result in a breach of fiscal neutrality without the need to identify distortion of competition or imbalance in the market. Accordingly we made no findings as to competition or imbalance in the market as an additional requirement to similarity. Mr Justice Norris endorsed the approach of the Tribunal at paragraph 36 of his judgment.

10.The third ground of the Respondents’ appeal to the Court of Appeal is as follows:

3.The learned judge further erred in law in upholding the conclusion of the Tribunal that, in relation to any difference in VAT treatment as between (i) Comparator Machines and (ii) Taxable Machines, there was thereby an infringement by the United Kingdom of the principle of fiscal neutrality. Since the evidence was that the difference in VAT treatment of Comparator Machines and Taxable machines did not cause any distortion of competition, the learned Judge should have set aside the Tribunal’s decision and dismissed the Respondents’ appeal against the Appellants’ decision to reject its claim for repayment of VAT.”

On the third day of the hearing the Tribunal raised the question whether in view of this ground of appeal the present decision should address the facts as to whether there was an actual distortion of competition. Both Dr Lasok and Mr Vadja agreed that the Tribunal should not engage in such a factual investigation since it is unnecessary on the basis of the decision of Mr Justice Norris by which the Tribunal is bound. We observe that any finding as to whether there was actual distortion of competition on the facts and its extent would have involved the prior question as to what legal test should be applied.

The evidence

11.In addition to the evidence at the first hearing, the following witnesses confirmed statements and were cross-examined: David Lees, Head of Machines Business at Ladbrokes; James David Thomas, until 2006 the chief executive of Thomas Holdings Ltd, the parent company of Thomas Estates Ltd; Simon Thomas, managing director of Thomas Estates Ltd until 2006; John Appleton, director of Electronic Leisure at Mitchells and Butlers Plc; Anthony Boulton, managing director of Project Coin Machines Ltd; Tom Kavanagh, formerly secretary to the Gaming Board of Great Britain and from 1 October 2005 deputy chief executive of the Gambling Commission, and Philip Sears and Brian O’Kane, respectively head of policy for VAT exemptions and zero and reduced rates and head of policy for excise duties at Customs and Excise (now HMRC) at the relevant time. A statement by Bernard Cunningham, Head of Leisure at the Department of Culture, Media and Sport, was admitted without cross-examination. Apart from exhibits to the witness statements, the documentary evidence included material disclosed by the parties and by the Gambling Commission and the Department of Culture, Media and Sport. Both parties provided written submissions and also submissions on the evidence which we have considered with care. There was a full transcript of the hearing.

The effect of TNT

12.While accepting that the Tribunal must follow Mr Justice Norris on the relevance of evidence of distortion of competition, Mr Vadja submitted that the Tribunal must apply the later decision of the Court of Justice in R (TNT Post UK Ltd) v Revenue and Customs Commissioners (Case C-357/07) [2009] STC 1438 when deciding whether there has been a breach of the principle of fiscal neutrality in a regulated industry; he said that in such cases, of which the present is an example, the Court focuses on whether there is different regulation and the perception of the user is not relevant. He submitted that on this aspect the decision of Mr Justice Norris has been overtaken by the decision inTNT. He said that all the relevant activities and supplies involving FOBTs, section 16/21 machines and Part III machines were under different regulatory regimes, so that the position was as in TNT and the activities were therefore not similar for the purposes of fiscal neutrality.

13.Since the effect of the TNT decision is relevant to the identification of comparators, a matter which is fundamental to this decision,we consider at the outset whether it does overtake the decision of Mr Justice Norris upholding the Tribunal.

14.TNT Post UK Ltd (“TNT Post”), whose services were subject to VAT, brought judicial review proceedings against HMRC challenging the lawfulness of the exemption under Group 3 of Schedule 9 to the VAT Act 1994 enjoyed by Royal Mail, which was the sole universal postal service provider in the United Kingdom pursuant to a licence under the Postal Services Act 2000. The licence obliged Royal Mail to provide at least one delivery to every address in the country on every working day and one collection every day from every access point at affordable prices uniformly applied throughout the United Kingdom.

15.TNT Post was licensed to convey letters within the United Kingdom but without the universal service obligations imposed on Royal Mail.

16.TNT Post, together with the Swedish and Finnish governments, contended that in a liberalised market exemption of the universal service infringed the principle of neutrality and harmed competition.

17.At paragraph 59 of her opinion, Advocate General Kokott said,

“59.The principle of fiscal neutrality, which is inherent in the common system of VAT …, precludes economic operators carrying out the same transactions from being treated differently in relation to the levying of VAT [citing inter alia J P Morgan Fleming Claverhouse Investment Trust plc v Revenue and Customs Commissioners (Case C-363/05) [2008] STC 1180, paragraph 46, a case to which we refer as AITC]. It includes the principle of elimination of distortion of competition as a result of differing treatment for VAT purposes [citing AITC paragraph 47].”

At paragraphs 61, 62 and 63 she said this,

“61.… It is in fact compatible with the principle of neutrality to exempt only the services performed by the universal service provider, in so far as, by reason of the special legal requirements to which they are subject, those services are not comparable with the services provided by other postal service providers and, therefore, no distortions of competition arise.

62.The essence of the universal services guaranteed … by Royal Mail is that all users are offered a certain range of postal services at all points … at a fixed tariff …

63.TNT is not obliged to offer comparable services. The principle of fiscal neutrality therefore categorically does not require that TNT’s and Royal Mail’s transactions be treated equally for tax purposes … [T]he assessment of the comparability of the transactions hinges not only on the comparison of individual services, but on the fact that they are part of a comprehensive range of provision offered by the public postal network.”

18.The Court of Justice endorsed the approach of the Advocate General, saying this at [38] and [39],

“[38]As the Advocate General observes in point 63 of her opinion, the assessment of the comparability of the services supplied hinges not only on the comparison of individual services, but on the context in which those services are supplied.

[39]… [O]n account of the obligations … required under its licence and connected with its status as the universal service provider, an operator such as Royal Mail supplies postal services under a legal regime which is substantially different to that under which an operator such as TNT Post provides such services.”

g19.Mr Vadja made the following submissions based on TNT.

(1)In looking at comparability for the purposes of fiscal neutrality in a regulated industry, it is necessary to look not at a comparison of the individual services but at the regulatory context in which the services are supplied.

(2)It is necessary to look at the services as a whole rather than the individual services.

(3)Royal Mail’s services were provided under a substantially different legal regime to that applying to TNT Post.

(4)The ECJ reached this conclusion although some services were identical and in competition.

(5)The conclusion of the ECJ did not depend in any way on whether the services were considered to be similar or identical from the perspective of the user.

(6)The ECJ would have reached the same result if TNT had not had a licence and was acting unlawfully.

20.Mr Vadja said that, following TNT, when dealing with regulated industries the perception of the users, here the players, is not a relevant factor when considering fiscal neutrality. The Court focuses on whether there is different regulation. He said that there are significant differences between the regulatory regimes governing FOBTs and Part III of the Gaming Act 1968 and between the regimes in Parts II and III of that Act. He said that the test whether a regulatory regime is “substantially different” is easily ascertainable and objective and does not depend on looking into the minds of individual consumers. It is consistent with the principle of legal certainty referred to by Lord Walker in Lex Services plc v Customs and Excise Commissioners [2004] STC 73 at [29].

21.Dr Lasok submitted that TNT did not change the law at all. The submission that when dealing with a regulated market, you look only at the type of regulation, and if the regulatory regime differs as between two classes of supplies the two classes are not similar was wrong. He cited paragraph 61 of the Advocate General, emphasising the words “in so far as”. He said that the significance of the regulatory regime in TNT was that the difference in legal regime affected the nature and comparability of the services in question; in this it was unlike AITC which was also a case with significantly different regulatory regimes. In TNT the regulatory regime created a material and objectively ascertainable difference in the nature of the services in question which override everything else. In the present case the Tribunal must ask the question whether or not the regulatory regimes hadany or any overriding relevance to the similarity of the supplies.

22.In our judgment the decision of the ECJ in TNT does not have the effect that supplies under different regulatory regimes are as a matter of principle not similar for fiscal neutrality purposes. We did not understand Mr Vadja to submit that it did have such effect, since he posed the question whether the regulatory regimes were substantially different. Clearly the greater the difference in regimes the greater is the relevance of such difference. In TNT the obligations on Royal Mail under its licence overrode everything else. In AITC there were regulatory differences in that investment trusts unlike unit trusts were not subject to authorisation by the Financial Services Authority, however the Court of Justice did not refer to this as a material factor in its decision. In Finanzamt Gladbeck v Linneweber (Case C-453/02 and C-462/02) [2005] ECR I-1131; [2008] STC 1069 the Court of Justice held that the principle of fiscal neutrality precluded different treatment of games of chance and gaming machines operated by licensed public casinos compared with those operated by other traders. Licensing of public casinos clearly involved a regulatory regime.

23.In our judgment, in contrast to the position in TNT, the differences in regulatory regimes between FOBTs and Part III machines and between section 16/21 machines and Part III machines fell far short of overriding everything else. The differences are merely a factor in deciding whether or not the supplies had “similar characteristics and [met] the same needs from the point of view of consumers”, see per Mr Justice Norris in the Chancery Division at [21]. The comparison is to be made “at a high level of abstraction and on the basis of broadly defined categories.” The consumers are of course the players.

24.As between section 21 machines, which were covered by Part II, and section 31 machines, falling within Part III, Mr Vadja stated at the first hearing that HMRC were not arguing that there was an objective consumer difference between a section 21 machine and a section 31 machine and for that reason was not cross-examining the Rank witnesses who stated that from the consumer’s point of view the two were the same. Inclosing in the first hearing on 23 April 2008 he stated [Day 8, page 52-3],