HMRC Expands VAT Taxation Of Gaming Machines

by Amanda Banks, Tax-News.com, London

13 October 2006

While the US Congress enacts repressive gambling legislation, the UK is licking its lips at the prospect that firms will flock to register under the Gambling Act, 2005, when it comes into operation in 2007. And HMRC is polishing up its tax weaponry, as well.

This week, the agency has introduced new regulations to clarify the application of VAT to gaming machines. Section 23 of the VAT Act 1994, which includes a corresponding definition of a gaming machine in the provision which determines the value on which VAT is accounted for on gaming machine takings, was amended in Finance Act 2006, with
retrospective effect from 6 December 2005, but inadvertently exempted some types of gaming machine from tax.

Two new Treasury Orders which were laid before Parliament this week will come into effect on 1 November 2006 and are intended to ensure that all gaming machines are liable to VAT.

The new Orders continue to update VAT law in light of the Gambling Act, and will:

• remove the separate definition of 'gaming machine' from Group 4, replacing it by a cross-reference to the identical definition in section 23;
• provide a new definition of 'game of chance' in Group 4 and Section 23, replacing the cross reference to the Gaming Act 1968 definition;
• ensure that the definition of 'game of chance' is the same across the UK for both Group 4 and Section 23;
• restore the application of VAT to pinball machines; and
• ensure that any game of chance which is not played for a prize does not fall within the exemption.

At present, section 23 and Group 4 contain identical definitions of 'gaming machine'. The new Group 4 Order replaces the definition of 'gaming machine' in Group 4 with a cross-reference to the section 23 definition, which is itself amended by the other Order.

The definition of 'gambling' was introduced into Group 4 and section 23 by inserting cross-references to the definitions of 'betting' and 'gaming' in the Gambling Act. The new Order amending section 23 replaces the cross-references to the Gambling Act with stand-alone definitions of 'game of chance', based on provisions in section 6 and section 239 of the Gambling Act. 'Betting' is no longer to be defined. The new definition of 'game of chance' in Group 4 applies for the use of the term in defining the scope of the exemption whether or not the game is played on a machine.

The takings from pinball machines had inadvertently been brought within the scope of the exemption by the PBR Order, when the Gambling Act concept of gaming was imported into VAT legislation dealing with gaming machines. VAT exemption is currently available for the provision of facilities for playing a game of chance, whether or not for a prize. Gaming machines are excluded from the scope of this exemption. Before the PBR order was introduced, pinball machines were taxed as gaming machines as it was not a requirement for a gaming machine to offer a prize. However, the PBR order applied Section 6(1) of the Gambling Act, which provides that gaming is playing a game of chance for a prize, to the definition of gaming machines. Although this meant that pinball machines were excluded from the definition of gaming machines, as they do not offer prizes, they still qualified for VAT exemption as the provisions of facilities for playing a game of chance.

In future, only a game of chance played for a prize, whether or not played on a machine, will qualify for exemption in any event. 'Prize' will be defined so as to exclude the opportunity to play the game again ('free plays').

Consequently, traders who have been accounting for VAT on pinball machines takings in the period from 6 December 2005 to 31 October 2006 may make a claim to HMRC for a repayment of output tax incorrectly paid, subject to the conditions set out below.

All adjustments or claims will be subject to the following conditions:

• All claims must take into account input tax that has been claimed, but which, while pinball machine takings were exempt, did not relate to taxable supplies.
• Businesses must be able to produce evidence that they accounted for VAT in the circumstances described above, and must be able to substantiate the amount claimed.

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