Slot machine company fails in appeal to UKSC over VAT-exemption for winnings

A slot machine company has failed in its appeal to the UK Supreme Court against a decision of the Court of Appeal that the winnings from its machines were subject to taxation as they were deemed to be “gaming machines”.

President of the Supreme Court, Lord Neuberger, sitting with Lord Reed, Lord Carnwath, Lord Toulson and Lord Hodge unanimously dismissed the appeal of The Rank Group Plc. The respondents were Commissioners for Her Majesty’s Revenue and Customs.

The question in this appeal was whether, in the period 1 October 2002 to 5 December 2005, the takings from slot machines (the disputed machines) operated by the appellants were subject to Value Added Taxation (VAT).

If the takings resulted from the provision of a “gaming machine”, as defined, then they were subject to VAT. The disputed element of the definition of “gaming machine” was: “the element of chance in the game is provided by means of the machine.” If this was not satisfied, then the takings from the disputed machines were exempt from VAT.

The disputed machines were computerised. The machines typically paid out according to the symbols on the machine when it stopped. The positions the reels came to rest on were chosen by a Random Number Generator (RNG), which was the system for producing numbers for the machine’s software.

The RNG was constantly generating random numbers. As soon as the lever was pulled or the button pressed, the most recent random number was used to determine the result. This meant the result varied depending on exactly when the game was played.

It was common ground that a slot machine was a “gaming machine” for VAT purposes when the element of chance was provided by a component that forms part of the body of the machine on which the game is played. This appeal concerned “multi-terminal” systems. In each case the RNG might be housed in a separate box or hung on the wall, but was connected by a wire to the playing terminals. Up to six playing terminals might be served by a single remote RNG.

Each terminal was designed to be used with the RNG obtained from the manufacturer of the terminal, the terminals and RNGs were sold together, and each RNG was “manufacturer-specific”. Though linked to a single RNG, each terminal could be operated independently and could offer the same or different games.

The VAT and Duties tribunal concluded, in favour of Rank, that the disputed machines were not “gaming machines” because the RNG was not part of any terminal and the element of chance was not provided by the machine containing the slot. The High Court agreed. The Court of Appeal overturned this decision; Rimer LJ considered that each terminal and the single RNG could together constitute a machine. Rank appealed to the Supreme Court.

Lord Carnwath, delivering the judgment of the court said the question was how the element of chance was provided “in the game”; the definition implied an active function in the game as it is played, rather than the mere passive transfer of information to the player. No-one suggested any good policy reason for distinguishing between on the one hand, embedded software or a single-terminal RNG, and on the other a multi-terminal RNG.

The natural meaning of “machine” in context supported the Court of Appeal’s approach. A typical and accurate definition from the Concise Oxford English Dictionary is “an apparatus using or applying mechanical power, having several parts, each with a definite function and together performing certain kinds of work.”

The overall purpose was the creation of a game of chance for the player, in which purpose both the terminal and the RNG play, and are designed to play, essential and connected functions. The tribunal’s approach limited attention to the physical identity of the equipment as viewed by the player, but ignored the necessary components of the task which the equipment is performing. The terminal was useless for playing the game without the RNG. Where the RNG was linked to a single terminal, the tribunal saw nothing wrong in principle in viewing them as together being a single machine for playing the game. Similarly, where the RNG served several terminals, it was appropriate to treat the combined apparatus as a “machine”.

Rank argued that this approach was inconsistent with the limits on the numbers of “machines” on any premises (section 31 of the Gaming Act 1968). That restriction seemed directed at the terminals available to individual players. It was not necessary to resolve the issue. The practical answer was that the word “machine”, where it mattered, could refer to an individual terminal.

But the relevant phrase was “the element of chance in the game is provided by means of the machine”. Chance is the possibility of something happening, not in the abstract, but for a particular player in the context of a particular game; the possibility of that player getting the combination of numbers which wins a prize, or a combination which does not.

The outcome of the game was determined by pressing a button or pulling a lever on the terminal. It was a more sophisticated equivalent of a player rolling a dice, where the winning number is produced “by means of” the player’s action in throwing the dice.

The RNG produced a pre-programmed sequence of numbers which changed very rapidly. The element of chance in any game was provided “by means of” the player’s action in pressing the button, so interrupting that ever-changing sequence at a particular moment.

The terminal was not simply communicating information from the RNG, but is the active means by which the winning or losing combination is generated. The RNG was a necessary part of the process, but its response (wherever it is situated) was entirely automatic. In these circumstances, it was a fair use of language, and consistent with the apparent policy of the legislation, to describe the element of chance as provided “by means of” the terminal.

Accordingly, Rank’s appeal was dismissed.

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