Court of Appeal quashes HMRC refusal of slot-machine duty relief

The Court of Appeal has allowed an appeal by eight bingo-hall and arcade operatorsNationalarchives against HMRC's refusal to relieve historic amusement machine licence duty assessmentsNationalarchives under an extra-statutory concession. The court quashed HMRC's decisions refusing the misunderstanding concession for assessments of £845,355 on the Thomas groupNationalarchives and £2,408,700 on the Noble groupNationalarchives, and ordered fresh decisionsNationalarchives. The court did not need to decide the parallel misdirection claim.

The assessments, raised in February 2008Nationalarchives for periods between December 2004 and July 2006Nationalarchives, treated slot machines with physically separate random number generators as gaming machines liable at category E ratesNationalarchives rather than the £250-a-year category A rateNationalarchives. In August and September 2004 Customs had written to the trade association BACTANationalarchives that terminals relying on a generator that was not an integral part of the terminal, described as remote from it, were not gaming machinesNationalarchives and needed only category A licencesNationalarchives, for dissemination to members. A January 2005 Customs manual statement said section 16 and section 21 terminals driven by a remotely sited generator could not be treated as gaming machinesNationalarchives. The Supreme Court later held in Rank that generator location was irrelevantNationalarchives, so the machines were gaming machines as a matter of lawNationalarchives; related VAT assessments were withdrawn on EU fiscal-neutrality grounds, which did not affect duty.

The court's central holding is that the meaning of HMRC's published statements is a question for the court, not a matter left to the decision-maker subject only to rationality reviewNationalarchives. Construed as a whole by an ordinarily sophisticated trade taxpayer, the BACTA letters equated remote with not an integral part of the terminalNationalarchives and required no element of distanceNationalarchives, a reading reinforced by the manual's unqualified final paragraph and by follow-up letters to each group. HMRC's later reading of remote as meaning far awayNationalarchives, developed in an internal report in August 2006Nationalarchives after the relevant periodNationalarchives, could not be projected back onto the guidanceNationalarchives.

On that basis the claimants' misunderstanding was bona fideNationalarchives: their evidence that they understood category A to be correct where the generator was separate from the terminalNationalarchives was clear and uncontrovertedNationalarchives. The court also rejected the negligence objectionNationalarchives, holding that taxpayers who reasonably found the position clear were not negligent in failing to seek specific confirmation of each machine's configurationNationalarchives. The remaining conditions of the concession were satisfiedNationalarchives: knowing evasion was never suggested, the correct category E treatment was nowhere clearly set out in guidanceNationalarchives, and duty of this kind is not charged on to customers.

The court admitted the unredacted internal Vale reportNationalarchives, holding the fresh-evidence test did not apply where material had wrongly been redacted from a document already in evidenceNationalarchives. The unredacted report confirmed that the far-away reading of remote was later thinking, while the contemporary internal advice treated a generator outside the machine as sufficient for category A.

For practitioners, the decision confirms that disputes over what HMRC guidance objectively meant are decided by the courtNationalarchives, and that refusals to apply the misunderstanding concession must engage with the guidance as actually written rather than with a later glossNationalarchives. HMRC must now remake the decisions on the Thomas and Noble assessments consistently with this interpretationNationalarchives. The legal basis is the Betting and Gaming Duties Act 1981 (sections 21 to 23 and 25) with the Value Added Tax Act 1994 Schedule 9 Group 4 exemption, the since-withdrawn extra-statutory concessions 3.4 and 3.5, and the reclassification of the machines as gaming machines from 2005 to 2006.