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VAT on gaming machine takings – a further twist!

Monday, 21 March 2016

Regular readers of this blog will be only too familiar with the long-running matter of the pre-2005 “Linneweber claims”. With more twists and turns than your average soap opera storyline, the latest instalment in this particular saga is now playing out for those taxpayers (including some of Dransfields’ club customers) who had their appeal stood behind Rank plc.

Background

For those less familiar with the story, a brief re-cap:

Since 2006, the case of Rank plc vs HMRC has been working its way through the judicial system, finally reaching the Supreme Court and resulting in a judgement on 8th July 2015, in favour of HMRC.

The initial argument made by Rank in 2006/2007 was that takings from one gaming machine should not be treated differently, from a VAT perspective, to the takings from another machine. This was the principle established in the European Courts of Justice by the case of Edith Linneweber. Rank’s action was brought to reclaim the VAT it had paid to HMRC prior to 5 December 2005, after which time the legislation was amended, ending the distinction between machine types.

Initially the UK Courts found in favour of Rank and they – and indeed many of Dransfield’s customers – received repayment of VAT together with interest as a result of this ruling.

More recently however, HMRC changed their argument and sought to rely upon the fact that they had been incorrect when they had treated some gaming machine income as being exempt from VAT and that in fact the law had required this income to be subject to VAT at the standard rate, thus removing the argument of fiscal neutrality.

Having won agreement from the Court of Appeal, HMRC proceeded last year to request the money back from those taxpayers (including clubs) that had received repayments, together with further interest.

The final decision on this matter was left to the Supreme Court, which somewhat surprisingly, in the eyes of many, found in favour of HMRC. 

Recent developments

Following that ruling in 2015, HM Courts & Tribunals Service has recently written to all taxpayers that had their appeal stood behind Rank plc, requesting that they now specify which Rank litigation they were referring to.

There have been two different strands of litigation which HM Courts & Tribunals Service refer to as Part 1 and Part 2.

Part 1 relates to the appeal that has been settled by the Supreme Court and referred to above, and which resulted in the claims that had previously been paid out having to be returned to HMRC.

Part 2 relates to ongoing appeals by Rank relating to two separate periods 01/11/98 to 05/12/05 and 06/12/05 to 31/01/13 which have yet to be determined by the courts.

This appeal is based on the VAT treatment of income from some gaming machines which differed to the VAT treatment of income from other gaming machines; it appears to be a replay of the HMRC’s ‘fiscal neutrality’ arguments –  albeit using different comparator machines.

What next?

And so to the 64miliion-dollar question – what next?

Since part 1 of the Rank litigation is now finalised – in favour of HMRC – HM Courts and Tribunal Service (HMCTS) is now asking all affected clubs whether they wish to withdraw their appeal(s) under part 2. Withdrawal would mean any chances of recovering monies from HMRC would be lost. Continuation would require justifying to HMCTS which ongoing litigation/case the club wishes to stand behind.

HMCTS has asked taxpayers that have appeals stood behind the Rank case to respond by 24th March 2016, setting out the nature of their appeal awaiting determination by the courts.

This is a complex VAT matter, and there are some very sizeable sums involved for taxpayers. However it looks like clubs may possibly have an opportunity to resurrect claims they previously thought to have been defeated by the Supreme Court judgement.

Clubs with a “Linneweber claim” have been advised to seek professional advice to determine what steps they should take next; we hope accountants are busy exploring what this means for their clients at this very moment.

Whatever happens, it would appear that this is almost (but not quite) the end of the road for this saga – unless the script writers come up with one final twist. Watch this space…

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