Flashback on ECJ Cases – C‑259/10 and C‑260/10 (The Rank Group) – Two identical supplies treated differently give rise to a distortion of competition

On November 10, 2011, the ECJ issued its decision in the joined cases C‑259/10 and C‑260/10 (The Rank Group).

Context: Taxation – Sixth VAT Directive – Exemptions – Article 13B(f) – Betting, lotteries and other forms of gambling – Principle of fiscal neutrality – Mechanised cash bingo – Slot machines – Administrative practice departing from the legislative provisions – ‘Due diligence’ defence

Article in the EU VAT Directive

Article 13B(f) of the Sixth VAT Directive (Article 135(1)(i) of the EU VAT Directive 2006/112/EC).

Article 135
1. Member States shall exempt the following transactions:
(i) betting, lotteries and other forms of gambling, subject to the conditions and limitations laid down by each Member State;

Facts

Rank is the representative member of a VAT group which operates bingo clubs and casinos in the United Kingdom in which customers have access to mechanised cash bingo (‘MCB’) and slot machines.
After having declared and paid to the Commissioners the VAT on services supplied by means of MCB and slot machines, Rank brought two separate actions before the Value Added Tax Tribunal, which is now the First Tier Tribunal (Tax Chamber) (‘the Tribunal’), to obtain repayment of that tax. The first action concerns the taxation of MCB between 1 January 2003 and 31 December 2005 and the second the taxation of slot machines between 1 October 2002 and 5 December 2005.
Those actions were essentially based on the argument that the different types of MCB and slot machines were treated differently for the purposes of exemption from VAT although they were comparable, indeed identical, from the consumer’s point of view and that, accordingly, the fact that certain types of MCB and slot machines were subject to VAT breached the principle of fiscal neutrality.
The MCB action
- MCB was played in sequences of several games. While the amount of the stake was announced in advance, the amount of the prize, which depended on the number of players in a particular game, could change during a block of games and even during the first part of a game, and was not necessarily known by the players at the time when they placed their stakes.
- It is common ground between the parties to the main proceedings that, owing to the reference to the Gaming Act 1968 in Item 1(b) of Group 4 of Schedule 9 to the VAT Act 1994, the exemption of MCB from VAT was applicable only if the stake was lower than or equal to 50 pence and the prize lower than or equal to GBP 25. On the other hand, if one of those conditions was not fulfilled, the game in question was not exempt from VAT. It is also common ground that these two types of MCB were identical from the customer’s point of view. The Commissioners maintained that, none the less, there was no breach of the principle of fiscal neutrality, since there was no evidence that the different treatment had affected competition between those games.
- By decision of 15 May 2008 the Tribunal found in favour of Rank. The Commissioners’ appeal against that decision was dismissed by the High Court of Justice (England and Wales), Chancery Division by judgment of 8 June 2009. The Commissioners then appealed against that judgment to the Court of Appeal (England and Wales) (Civil Division).
The slot machines action
- As regards slot machines, the application of the exemption from VAT provided for in Group 4, Item 1, of Schedule 9 to the VAT Act 1994 was excluded if the machine in question made available to the player was a ‘gaming machine’ within the meaning of Items 1(d) and 3 of Group 4.
- In that regard, the slot machines operated by Rank and regarded as such gaming machines, which at the same time come under Part III of the Gambling Act 1968 (‘Part III machines’), are compared with two other types of slot machine, according, in particular, to whether or not the element of chance in the game is provided, on demand by the gaming software incorporated in the machine used by the player, by that machine itself.
- As regards the taxed Part III machines, that element is provided by an electronic random number generator (‘RNG’) physically incorporated in the machine used by the player. On the other hand, the first type of comparator (‘comparator machines I’) consists of machines a number of which are electronically connected to a common, separate RNG, which is none the less situated in the same premises as the terminals used by players.
- The second type of comparator consists of ‘Fixed Odds Betting Terminals’ (‘FOBTs’) which could be installed only in LBOs. A player using a FOBT bet on the outcome of an event or a ‘virtual’ game (a ‘format’) loaded on to the software of the FOBT by inserting credit in the terminal. The outcome of the event or the virtual game was determined by means of an RNG placed outside the LBO premises in question. A dispute as to whether, regard being had to the law on the regulation of gaming, certain formats available on FOBTs offered ‘betting’ or ‘playing’ was not settled by a judgment because the parties concerned reached an agreement. Because FOBTs did not correspond to the definition of ‘gaming machine’ in VAT law, they were exempt from VAT. However, they were subject to general betting duty.
- Before the Tribunal, it was undisputed that the taxed Part III machines and comparator machines I were similar from the consumer’s point of view. On the other hand, the Commissioners denied, in particular, that the two categories of machines were in competition with each other and that the comparator machines I were actually exempt under domestic law.
- By decision of 19 August 2008 the Tribunal found in favour of Rank on certain points at issue and deferred to a later stage its decision on other points. In that first decision the Tribunal considered, in particular, that comparator machines I were exempt from VAT under domestic legislation. In any event, in practice the Commissioners had deliberately treated the comparator machines I as exempt.
- The Commissioners’ appeal against that decision was dismissed by the High Court of Justice (England and Wales), Chancery Division, on 8 June 2009. The Commissioners appealed against that judgment to the Court of Appeal (England and Wales) (Civil Division), challenging in particular the finding that there existed a relevant practice of treating comparator machines I as VAT exempt supplies.
- On 11 December 2009 the Tribunal found in favour of Rank on the issues on which it had reserved judgment initially. With respect to comparator machines I, the Tribunal found that the Commissioners could not rely on the ‘due diligence’ defence, even though the comparator machines I had been placed on the market only after the adoption of the domestic legislation at issue. The Tribunal also held that there had been a breach of the principle of fiscal neutrality with respect to the FOBTs, which were, to a high level of abstraction, similar to taxed Part III machines from the point of view of the majority of players. The two types of machines are regarded simply as gambling machines. The differences are either not known or are irrelevant to most consumers.
- The Commissioners appealed to the Upper Tribunal (Tax and Chancery Chamber) against the judgment of 11 December 2009. That appeal relates, in particular, to the examination of the similarity between taxed slot machines and FOBTs and also to the rejection of the due diligence argument.
By order of the President of the Court of 9 August 2010, Cases C‑259/10 and C‑260/10 were joined for the purposes of the written and oral procedures and of the judgment.

Questions

C-259/10

1. Where there is differential VAT treatment:

– as between supplies that are identical from the point of view of the consumer; or
– as between similar supplies that meet the same needs of the consumer;

is that of itself sufficient to establish an infringement of the principle of fiscal neutrality or is it relevant to consider (and, if so, how)

(a) the regulatory and economic context;
(b) whether or not there is competition between the identical services or, as the case may be, the similar services in question; and/or
(c) whether or not the different VAT treatment has caused distortion of competition?

2. Is a taxpayer whose supplies are, as a matter of national law, subject to VAT (by reason of the exercise by a Member State of its discretion under Article 13B(f) of the Sixth Directive) entitled to claim a repayment of VAT paid on those supplies on the basis of an infringement of the principle of fiscal neutrality arising out of the VAT treatment of other supplies (“comparator supplies”) where:

(a) as a matter of national law, the comparator supplies were subject to VAT but
(b) the taxing authority of the Member State had a practice of treating comparator supplies as exempt from VAT?

3. If the answer to Question 2 is in the affirmative, what conduct amounts to a relevant practice, and in particular:

(a) is it necessary that the taxing authority has made a clear and unambiguous statement that comparator supplies would be treated as exempt from VAT;
(b) is it relevant that at the time the taxing authority made any statement it had an incomplete or incorrect understanding of facts relevant to the correct VAT treatment of the comparator supplies; and
(c) is it relevant that VAT was not accounted for by the taxpayer, or sought by the taxing authority, in respect of the comparator supplies, but that the taxing authority has subsequently sought to recover that VAT, subject to the normal domestic limitation periods?

4. If the difference in fiscal treatment results from a consistent practice of the domestic tax authorities based on a generally accepted understanding of the true meaning of domestic legislation, does it make any difference to the existence of a breach of the principle of fiscal neutrality if:

(a) the tax authorities subsequently change their practice;
(b) a national court subsequently holds that the amended practice reflects the correct meaning of domestic legislation;
(c) the Member State is precluded by domestic and/or European law principles, including legitimate expectation, estoppel, legal certainty and non retroactivity, and/or by limitation periods from collecting the VAT on the supplies previously regarded as exempt?

C-260/10

1. Where a Member State in the exercise of its discretion under Article 13B(f) of the Sixth VAT Directive subjected certain types of machines used for gambling (“Part III gaming machines”) to VAT, while retaining exemption for other such machines (which included fixed odds betting terminals, “FOBTs”), and where it is contended that in so doing the Member State infringed the principle of fiscal neutrality: is it (i) determinative, or (ii) relevant, when comparing Part III gaming machines and FOBTs that

(a) FOBTs offered activities that were “betting” under domestic law (or activities that the relevant regulatory authority, for the purposes of exercising its regulatory powers, was prepared to treat as “betting” under domestic law) and
(b) Part III gaming machines offered activities subject to a different classification under domestic law, namely “gaming”

and that gaming and betting were subject to different regulatory regimes under that Member State’s law relating to the control and regulation of gambling? If so, what are the differences between the regulatory regimes in question to which the national court should have regard?

2. In determining whether the principle of fiscal neutrality requires the same tax treatment of the types of machine referred to in Question 1 (FOBTs) and Part III gaming machines, what level of abstraction should be adopted by the national court in determining whether the products are similar? In particular, to what extent is it relevant to take into account the following matters:

(a) similarities and differences in the permitted maximum stakes and prizes as between FOBTs and Part III gaming machines;
(b) that FOBTs could be played only on certain types of premises licensed for betting, which were different, and subject to regulatory constraints that were different from those applicable to premises licensed for gaming (although FOBTs and up to two Part III gaming machines could be played alongside each other in premises licensed for betting);
(c) that the chances of winning the prize on FOBTs were directly related to the published fixed odds, whereas the chances of winning on Part III gaming machines could in some cases be varied by a device that ensured a particular percentage return to the operator and player over time;
(d) similarities and differences in the formats available on FOBTs and Part III gaming machines;
(e) similarities and differences between FOBTs and Part III gaming machines in the interaction which could occur between the player and the machine;
(f) whether or not the matters referred to above were either known to the generality of players of the machines or regarded by them as relevant or important;
(g) whether the difference in VAT treatment is justified by any of the above?

3. In a situation where a Member State, in the exercise of its discretion under Article 13B(f) of the Sixth VAT Directive, exempted gambling from VAT but subjected a defined class of machines used for gambling to VAT:

(a) is there in principle a defence of due diligence available to a Member State to a claim that the principle of fiscal neutrality has been infringed by that Member State; and
(b) if the answer to (a) is “yes”, what factors are relevant in determining whether or not the Member State is entitled to rely on that defence?

AG Opinion

None

Decision

1. The principle of fiscal neutrality must be interpreted as meaning that a difference in treatment for the purposes of value added tax of two supplies of services which are identical or similar from the point of view of the consumer and meet the same needs of the consumer is sufficient to establish an infringement of that principle. Such an infringement thus does not require in addition that the actual existence of competition between the services in question or distortion of competition because of such difference in treatment be established.

2. Where there is a difference in treatment of two games of chance as regards the granting of an exemption from value added tax under Article 13B(f) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, the principle of fiscal neutrality must be interpreted as meaning that no account should be taken of the fact that those two games fall into different licensing categories and are subject to different legal regimes relating to control and regulation.

3. In order to assess whether, in the light of the principle of fiscal neutrality, two types of slot machine are similar and require the same treatment for the purposes of value added tax it must be established whether the use of those types of machine is comparable from the point of view of the average consumer and meets the same needs of that consumer, and the matters to be taken into account in that connection are, inter alia, the minimum and maximum permitted stakes and prizes and the chances of winning.

4. The principle of fiscal neutrality must be interpreted as meaning that a taxable person cannot claim reimbursement of the value added tax paid on certain supplies of services in reliance on a breach of that principle, where the tax authorities of the Member State concerned have, in practice, treated similar services as exempt supplies, although they were not exempt from value added tax under the relevant national legislation.

5. The principle of fiscal neutrality must be interpreted as meaning that a Member State which has exercised its discretion under Article 13B(f) of the Sixth Directive 77/388 and has exempted from value added tax the provision of all facilities for playing games of chance, while excluding from that exemption a category of machines which meet certain criteria, may not contest a claim for reimbursement of VAT based on the breach of that principle by arguing that it responded with due diligence to the development of a new type of machine not meeting those criteria.

Summary

The principle of neutrality is already infringed if there is a difference in treatment for the VAT of two supplies of services which are identical or similar from the consumer’s point of view and which meet the same needs of the latter. It is therefore not also necessary to demonstrate that there is actual competition between the services concerned or that there is distortion of competition because of that difference in treatment.

Where two games of chance are treated differently for the purpose of granting a VAT exemption, the principle of neutrality must be interpreted as meaning that it must not be taken into account that those two games belong to different categories of licenses and are subject to different rules of management and regulation .

When assessing whether two types of slot machines are similar and should be treated equally for VAT purposes, it is necessary to consider whether the use of the two types is comparable from the point of view of the average consumer and meets the same needs of the latter, special consideration can be given to the minimums and maximums of the stake and the prizes and the odds of winning.

The principle of neutrality must be interpreted as meaning that a taxable person cannot rely on a breach of that principle to claim a refund of the VAT paid on certain services where, in practice, the tax authorities of the Member State concerned have treated similar services as exempt supplies, although they have been exempted under the applicable national regulations are not exempt from VAT.

The principle of fiscal neutrality must be interpreted as meaning that a Member State which has exercised the discretion afforded and exempted from VAT the provision of the opportunity to practice games of chance of any kind, but a category of machines meeting certain criteria of those exemption, cannot plead against an application for a refund of VAT based on breach of that principle that it reacted with due care to the development of a new type of vending machine which did not meet those criteria.

Source:

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