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Session 2005 - 06
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Standing Committee Debates

Sixth Standing Committee on Delegated Legislation

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Sixth Standing Committee on Delegated Legislation

The Committee consisted of the following Members:


Mr. Peter Atkinson

†Austin, John (Erith and Thamesmead) (Lab)
Bacon, Mr. Richard (South Norfolk) (Con)
†Campbell, Mr. Ronnie (Blyth Valley) (Lab)
†Clark, Greg (Tunbridge Wells) (Con)
†Donohoe, Mr. Brian H. (Central Ayrshire) (Lab)
†Healey, John (Financial Secretary to the Treasury)
†Hoban, Mr. Mark (Fareham) (Con)
†Huhne, Chris (Eastleigh) (LD)
†James, Mrs. Siân C. (Swansea, East) (Lab)
†Kilfoyle, Mr. Peter (Liverpool, Walton) (Lab)
†Kramer, Susan (Richmond Park) (LD)
MacShane, Mr. Denis (Rotherham) (Lab)
Selous, Andrew (South-West Bedfordshire) (Con)
†Simon, Mr. Siôn (Birmingham, Erdington) (Lab)
Stuart, Mr. Graham (Beverley and Holderness) (Con)
†Watson, Mr. Tom (Lord Commissioner of Her Majesty’s Treasury)
†Wright, Mr. Iain (Hartlepool) (Lab)
Tom Healey, Committee Clerk

† attended the Committee

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Tuesday 10 January 2006

[Mr. Peter Atkinson in the Chair]

Value Added Tax (Betting, Gaming and Lotteries) Order 2005

4.30 pm

The Financial Secretary to the Treasury (John Healey): I beg to move,

    That the Committee has considered the Value Added Tax (Betting, Gaming and Lotteries) Order 2005 (S.I., 2005, No. 3328).

May I say, Mr. Atkinson, that it is again a pleasure to serve under you as the Chairman of the Committee? I look forward to your firm, fair and clear guidance.

I welcome the hon. Member for Fareham (Mr. Hoban) to what is, I understand, his first Committee considering a statutory instrument as an Opposition Front-Bench spokesman on Treasury matters; I am sure that it will not be his last. I look forward to doing more such Committees together. I also welcome my hon. Friends and the interest that they are showing in the issue of VAT on certain gaming machines. It is gratifying when such interest is shown.

The order amends VAT legislation to ensure that all machines that are capable of being used for gaming are covered by the definition of a gaming machine and are therefore subject to VAT. The order had effect from 6 December 2005, the day after the Chancellor of the Exchequer’s pre-Budget report. It defines a gaming machine as

    “a machine which is designed or adapted for use by individuals to gamble (whether or not it can also be used for other purposes).”

It may help the Committee if I briefly outline the background to the order. As the hon. Member for Eastleigh (Chris Huhne) will know, article 13 of the sixth VAT directive, which was introduced with VAT in 1972, exempts betting, lotteries and other forms of gambling from VAT, although it is within the discretion of member states to determine the conditions and limitations of such exemptions. In the UK, although betting and gaming is generally exempt from VAT, the net takings of gaming machines, including fruit machines, are liable to VAT at the standard rate. That is because gaming machines are often sited in a large number of smaller non-gambling premises such as pubs and clubs. Such organisations and companies account for VAT on other items that they sell. If we took machines out of VAT for such companies, and applied excise duties only at an equivalent rate, they would have to make additional calculations to apportion their VATable and non-VATable sales, thus significantly increasing their compliance costs. This exception to the VAT exemption has been in place in the UK since 1975.

In the past two or three years, we have had lengthy consultation with the machine industry on the future of machine taxation, during which time the Gambling
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Bill has progressed through Parliament and been enacted as the new Gambling Act 2005. We ran a formal consultation in 2003, and since then a series of informal consultations, meetings and discussions have continued to take place. Although we received a range of views from across the industry, it told us that it broadly wants to retain VAT and the amusement machine licence duty—the AMLD—which is an excise tax that varies according to the size of the stake and prize offered by the machine. The industry broadly argued for maintaining tax stability—retaining the current tax regimes—in what it sees as a period of transition and uncertainty for the wider industry with the introduction of the Gambling Act, the impact of a smoking ban and the rapidly changing developments in technology and international markets.

We listened carefully to what the industry said and we announced in the pre-Budget report of 5 December that rather than move to a gross profits tax, we would retain VAT and AMLD and align machine definitions with the new Gambling Act. We also announced that we would consider options with the industry for simplifying AMLD to reduce compliance costs further.

The definitions of a gaming machine for VAT and excise purposes, or in VAT and excise law, have traditionally followed those contained in social law. That is sensible, as the Committee will appreciate, because it ensures consistency between the regulatory and tax regimes, and therefore provides greater clarity for machine operators. The social law definition has been updated by the Gambling Act 2005 to reflect new technology that allows gaming machines to operate in ways that were not envisaged when the Gaming Act 1968 was enacted nearly 40 years ago. The updated social law definition, contained in section 235 of the 2005 Act, brings all machines used for gaming within the category of a gaming machine regardless of how the game is provided.

In practical terms—this is the nub of what the order is designed to deal with—that means that it is no longer relevant whether the element of chance in the game is provided by means of the machine itself or whether the machine uses a remote random number generator. Previously, only machines that themselves provided the element of chance in the game were classified as gaming machines, and therefore liable to VAT. That meant that those that relied on a random number generator that was located away from the machine were not considered to be taxable for VAT purposes.

Regrettably, in recent times, certain operators have exploited that differentiation by relocating the random number generators that had previously been inside the machines, allowing them to offer higher prizes without paying the appropriate level of AMLD and, crucially, to avoid paying VAT altogether. In the biggest example that we have uncovered of such a move, one company had deliberately reconfigured the vast majority of nearly 1,300 machines in such a way as to enable itself to avoid paying VAT—a total avoidance of about £500,000.

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It is sensible to make changes to the tax law definitions of a gaming machine, for both VAT and excise purposes, to reflect the new social law definition that is contained in the Gambling Act 2005. Technically, the order updates the definition contained in note (3) to group 4 of schedule 9 to the Value Added Tax Act 1994, using the definition contained in section 235 of the Gambling Act as a template. Corresponding reforms are also needed in excise law to align the definitions of gaming machines and machine categories with the Gambling Act 2005 and these will take place from the Budget of 2006. They will be enacted in the Finance Act, because they will require primary rather than secondary legislation.

Mr. Peter Kilfoyle (Liverpool, Walton) (Lab): I hope that the Financial Secretary will forgive my ignorance. Can he clarify the order for me? Updated note (3) defines “gaming machine”. Would a home computer that was used for gambling as part of a syndicated gambling enterprise be such a machine, and therefore liable to VAT?

John Healey: My hon. Friend raises an important point. That is one of the exceptions, so the straight answer is no. The mere sale of machines such as domestic computers or mobile phones is not considered to be a supply of gaming activity, and therefore is not covered by the provisions of the order.

The effect of the order is that all machines classified as gaming machines under the Gambling Act will now pay VAT. That includes fixed odds betting terminals and so-called section 16 and section 21 machines that were previously exempt from VAT because they operate using remote random number generators.

Mr. Kilfoyle: I am genuinely perplexed. The order specifies

    “a machine which is designed or adapted for use”.

Surely that adaptation could take place through the software that is used on the personal computer. How is that covered? Perhaps I am missing something.

John Healey: As I tried to explain to my hon. Friend, the sale of a computer or a mobile phone is a supply to a customer for purposes other than gaming. To that extent, it is not covered by the order and is not in the category of newly VATable supplies with which we are concerned. By means of the new definition, we are consolidating gaming machines in tax law, as the Gambling Act does in social law.

As I was saying, we shall introduce legislation in the Finance Bill to bring these machines under amusement machine licence duty. At the same time, we shall remove the liability to general betting duty on fixed odds betting terminals, and the removal of GBD will be backdated to 6 December.

We have decided to bring the order into immediate effect, rather than waiting for the Gambling Act to be implemented. That is because the current definition of a gaming machine, which relies on the outcome being generated

    “by means of the machine”,

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has caused some uncertainty in the industry. Some operators have put in claims for VAT repayments in the light of a recent ruling by the European Court of Justice concerning gaming machines. Those claims now total more than £100 million. As I explained, others are attempting to avoid tax by seeking to reposition the random number generator, which determines the outcome of the game, outside the machine.

Let me make it clear that we emphatically do not accept that such claims for VAT repayments and attempts to avoid tax have legal justification. However, it is clearly unsatisfactory for tax definitions to create uncertainty or encourage attempted avoidance. In line with our general commitment to provide the industry with stability and certainty on tax issues and to protect tax revenue due to the public purse, we are making the change in the order with immediate effect. By doing so, we are capping potential repayment losses and removing avoidance scams, without prejudicing the ability of Her Majesty’s Revenue and Customs to resist such claims.

As the regulatory impact assessment makes clear, the order’s compliance cost effects are minimal. On that basis, I commend it to the Committee.

4.42 pm

Mr. Mark Hoban (Fareham) (Con): May I echo the Financial Secretary’s words in welcoming the opportunity to serve under your chairmanship, Mr. Atkinson? I also thank him for his warm words of welcome. I suspect that of the statutory instruments and aspects of the Finance Bill that we shall debate, the order is among the least controversial.

As I understand the Financial Secretary’s comments and the explanatory note, there are three objectives behind the order. As he said, they are to bring tax legislation into line with the Gambling Act 2005; to remove any doubt that the judgment in the Linneweber case, to which I think he referred, could be used to recover VAT that has already been paid; and to close the loophole that arises if the element of chance is located outside the gaming machine.

I understand the approach that the Minister has adopted, but I want to ask about the Linneweber judgment and about what has triggered the large repayment claims—he mentioned £100 million—submitted by people in the gaming industry. He said that introducing the order now would cap the liability that the Treasury faces as a result of those repayment claims, but at what level is that liability capped? Is it capped at £100 million or at a lower level? I would welcome clarity on that.

What impact will the Linneweber judgment have on VAT treatment in this regard? I have read the judgment, and the argument made in the European Court of Justice was that the location of a gaming machine should have no impact on the tax treatment of the takings from that machine. As I understand it, the order refers to the location of the random number generator—the element of chance—rather than to where the machine is situated, be that in a betting shop, an amusement arcade or a casino. I want to
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understand a little more about how the Linneweber judgment applies in this situation. The explanatory note is not as clear as it could be on that subject.

Those are the principal points. We support the Government in closing loopholes on the taxation of gaming machines and in bringing the definition of gambling into line with that of the Gambling Act 2005. However, I would appreciate some clarification of the role of the Linneweber judgment in formulating the order.

4.45 pm

Susan Kramer (Richmond Park) (LD): I am delighted to speak on a non-controversial issue. I do not want to repeat what has already been said, but I have two questions. I understand that the change in the definition of “gaming machine” to bring it into line with the Gambling Act 2005 will mean that a number of small bookmakers will have to register for VAT. Only a small number—about 300—will be affected, but I seek an assurance from the Financial Secretary that an attempt will be made to communicate with those businesses, as they are probably completely unaware of the various changes that are taking place and may unnecessarily find themselves violating that rule.

I refer next to the Linneweber judgment, picking up on what was said by the hon. Member for Fareham. Two further changes have to be made to bring the entire industry into line with the definitions. The Financial Secretary said that they will be dealt with under the Finance Bill. Will that leave further exposure to judgments under Linneweber? Will the Financial Secretary give some sort of monetary definition of the remaining exposure that will result from the delay in bringing those final pieces of legislation into line?

4.47 pm

John Healey: The hon. Member for Fareham asked about the relevance to the order of the Linneweber case in the European Court of Justice. As I explained in my opening remarks, it had no relevance to our judgment that it was right in principle to align the tax definitions of gaming machines with the new social law definitions set out in the Gambling Act 2005. The Linneweber case influenced only the timing of the change. The argument that we were right to make the change was clear-cut.

We decided to make the change with effect from 6 December. I have already explained to the Committee that the current value of claims encouraged by the Linneweber case is about £100 million. By acting immediately, we capped a potential loss, at the extreme end, of £235 million a year.

I wish to be clear—I do not want our debate to give succour or encouragement to those who are considering filing a claim or who have already filed claims—that the Linneweber judgment applies to a particularly German situation. As I explained earlier,
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the VAT directive and its application to the exemption of betting and gaming activities gives every member state the ability to put constraints and limitations on the extensions to VAT that they apply, and every member state does so differently. We strongly believe that the conclusions in the Linneweber case that apply to Germany are not relevant here. We have extremely strong grounds for resisting the claims that have been filed. The VAT that has already been charged and collected has been properly charged and collected. We will resist clearly and fight hard those claims that have been filed.

Mr. Hoban: I am grateful to the Minister for what he said about the Linneweber case. He said that the case refers to peculiarly German circumstances, but will he explain why tax advisers and gaming machine operators believe that the Linneweber case has provided the opportunity to put forward such claims?

John Healey: Because that is the nature of the business that tax advisers are in. The Linneweber case concentrated on the treatment in Germany of identical machines in different locations. That is not the case in the UK, and it is not the basis of the claims that are being made. However, we shall see. I hope that I have dealt with the Linneweber issue.

The questions asked by the hon. Member for Richmond Park (Susan Kramer) were essentially twofold. First, she asked about the impact of the order, particularly on small bookmakers. Secondly, she asked what steps we had taken to provide information to them to make sure that they knew what was happening.

The hon. Lady will have read the relevant regulatory impact assessment; that was probably at the root of her question. In it, we estimated that, of a total population of about 1,200, about 300 small bookmakers would have to register for VAT as a result of this order and might be affected by client costs as a result. Having been able to look at the issue more closely, we now estimate that about 200 will be affected and that the compliance costs will be one-off for almost all of them and will probably be in the region of £1,000. The ongoing costs of compliance thereafter will be negligible. As she will appreciate, larger bookmakers are likely to be registered for VAT purposes already and the costs to them of complying with this order will be negligible.

Susan Kramer: Does the Financial Secretary still intend that, in one to two years from now, there will be a review to ascertain the impact on those bookmakers? I understand that that was part of the regulatory impact assessment proposal.

John Healey: We take a reasonable amount of trouble to assess after implementation the impact of changes that we introduce to tax regimes. If the hon. Lady looks at our record since 1997, she will see that we have done that consistently and built it into our policy-making process. So the short answer to her question is yes.

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On the question of the trade being informed, Her Majesty’s Revenue and Customs published details of the changes in a business brief on the day of the pre-Budget report. I wrote to the associations that have an interest in the issue on pre-Budget report day. An explanation of the changes has also been enclosed with the monthly general betting duty returns that are sent to all bookmakers. We have probably done as much as is possible and realistic to inform the trade.

The hon. Lady might like to look at a recent issue of Coinslot, the trade newspaper that on 16 December ran a detailed editorial that was generally positive about
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the changes. It was also extremely informative, and I am sure that it will play an important part in making sure that the very smallest bookmakers are fully aware of the changes. On that basis, I hope that Committee members from all parties will give the order their approval.

Question put and agreed to.


    That the Committee has considered the Value Added Tax (Betting, Gaming and Lotteries) Order 2005 (S.I., 2005, No. 3328).

Committee rose at seven minutes to Five o’clock.


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