First-tier Tribunal (Tax)

[2011] UKFTT 368 (TC)

TC01223

Appeal number: TC/2010/07835

VAT – application to strike out Notice of Appeal – application for permission to appeal out of time – Appellant not initially advised of time limits – whether initial claim a protective claim – factors to be taken into account by the Tribunal in exercising its discretion to grant extension of time to appeal – appeal dismissed.

FIRST-TIER TRIBUNAL

TAX

BLACK PEARL ENTERTAINMENTS LIMITED Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL: MICHAEL S CONNELL (TRIBUNAL JUDGE)

Sitting in public at City Exchange, Albion Street, Leeds  on 8 March 2010

Mr Simon Buchan of Messrs Barber Harrison & Platt, Chartered Accountants, Sheffield, for the Appellant

Mrs Kim Tilling, Senior Advocate of HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2011

DECISION

1. This is an application by HMRC to strike out an appeal. The Appellant applies to the Tribunal for permission to appeal out of time against a decision by HMRC on 17 January 2007 to deny a VAT recovery claim. The Appellant lodged its notice of appeal with the Tribunal on 4 October 2010.

2. On 20 December 2006 the Appellant submitted a voluntary disclosure to recover £58,901 VAT which it had paid in respect of gaming machine income "from the 19 November 1992 to date". The Appellant explained that:

“the reason for the claim is that we believe that output tax should not have been declared on amusement machine takings prior to 06 of December 2005 following the Linnewebber case by the ECJ. Up to this point, in the UK, takings from amusement machines commonly sited in pubs and clubs were subject to VAT at the standard rate. These machines are usually licensed under section 31or section 34 (1) of the Gaming Act 1968. However the takings from other amusement machines such as fixed odds betting terminals ( FOBT’s) and section 16 and 21 machines which are similar to the types of machine found in pubs and clubs were VAT exempt.

The ECJ in the Linnewebber case ruled that you cannot tax "like" services differently, and found that the German VAT authorities were incorrectly exempting amusement machine takings in casinos but subjecting them to VAT in other venues

It is our view that prior to 06 December 2005 in the UK, HMRC were also applying different VAT treatments to "like" services and that this treatment is incorrect following the ECJ decision in the Linnewebber case.

We have attached a schedule of output tax has declared on amusement machine takings up to 05 December 2005 ….".

3. The background to this case is that prior to 6 December 2005 the takings of gaming machines as defined in Group 4 of Schedule 9 to the VAT Act 1994 were liable to VAT at the standard rate of 17.5%, because they were excluded from the exemption for betting and gaming which that Group provided. The then current definition of ‘gaming machine’ covered those machines where the element of chance in the game was provided by ‘means of the machine’, which were taxable for VAT purposes, whereas games of chance played on machines where the result is determined by other means were VAT exempt. Some machines were configured so that the random number generator which determines the outcome of the game was sited outside the machine and consequently those machines fell outside the definition of a taxable gaming machine. Other machines had been developed to take advantage of section 16 of the Lotteries and Amusements Act 1976 or section 21 of the Gaming act 1968 i.e. that provide small prize gaming, and FOBT’s, which were respectively subject to Amusement Machine Licence Duty and General Betting Duty but VAT exempt. The Linnewebber case, decided that Article 13B (f) of Sixth Council Directive (EEC) 77/388 (on the harmonisation of the laws of member states relating to turnover taxes - common system of value added tax: uniform basis of assessment) precluded national legislation which provided that the operation of all games of chance and gaming machines was exempt from VAT where it had been carried out in licensed public casinos, while the operation of the same activity by traders other than those  running casinos did not enjoy the same exemption.  The suggestion was that UK law that similarly breached the European Community principle of fiscal neutrality because of the different VAT treatment of similar machines. The revised definition of a gaming machine, which came into force on 6 December 2005 changed the definition of gaming machine so as to provide that FOBT’s and section 16/21 machines were defined as gaming machines and also created greater certainty by confirming that, where the element of chance in the game is provided, is not relevant. The likelihood remained however, that HMRC would receive many claims for VAT refunds for the period prior to 5 December 2005

4. On 17 January 2007 HMRC refused the Appellants claim saying that:

"all gaming machine takings are treated equally; all machines are now liable to VAT. You (claim) that all gaming machine takings have no VAT chargeable whereas in fact the opposite will apply. The case of Linnewebber considered the European principle of fiscal neutrality as it applies to VAT, specifically looking at the different tax treatment that had been applied to identical gaming machines in Germany solely on the basis that the machines were situated in different locations. The UK has not applied different VAT liabilities to identical gaming machines and HMRC do not accept that the U.K.'s tax treatment of gaming machines breached the principal and fiscal neutrality. "

The decision letter did not include an offer of an HMRC review of the decision but informed the Appellant company that it did have the right to appeal to an Independent VAT Tribunal. No further information was provided and no time limits for appealing were mentioned.

5. The Appellant did not respond to or appeal HMRC's decision letter and the time-limit for appealing HMRC's decision expired 30 days from the date of the decision letter, that is on 16 February 2007.

6. On 17 July 2009 the Appellant wrote to HMRC referring to its letter of 20 December 2006, requesting a repayment of VAT on the basis of a decision of the High Court in Rank Group Plc v HMRC on 8 June 2009, to the effect that takings from gaming machines and certain other machines prior to 6 December 2005 were VAT exempt. The case of Rank Group Plc v HMRC, (decision number 20777, V&DR 304) is referred to in more detail below.

7. On 9 September 2009 by e-mail, to the Appellant company's e-mail address (which could be found on the Appellant company's letter headed paper), HMRC rejected the Appellant’s claim of 17 July 2009. HMRC did not refer to the previous refusal of the claim on 17 January 2007 and did not give any reasons for its decision but referred the Appellant to an HMRC link detailing "HMRC's current position." The e-mail stated that if the Appellant did not agree with the decision it could ask for a review or appeal to an independent Tribunal and that if a review was required the Appellant should write to HMRC within 30 days of the date of "this letter" giving reasons why the Appellant did not agree with the decision. HMRC further explained that if the Appellant wished to appeal to the Tribunal it should do so within 30 days of the date of "this letter." HMRC referred the Appellant to its website which provided information regarding appeals and reviews and also referred the Appellant to the Tribunal service website.

8. The Appellant says that it "missed " the e-mail from HMRC and therefore did not appeal within the requisite 30 day period, that is by 9 October  2009. Believing that HMRC had not responded to its letter of 17 July 2009, the Appellant followed up that letter with a reminder letter to HMRC on 13 May 2010.

9. On 11 June 2010 HMRC replied that the Appellant’s claim for repayment of VAT would not be processed for the reason that the Appellant had not appealed the original refusal by HMRC on 17 January 2007.

10. The Appellant replied on the 20 July 2010 that the reason it had not appealed HMRC's original refusal in January 2007 was because it had made the decision to await the outcome of the Rank case as it was likely that any appeal would be stood over pending the outcome of Ranks appeal. The Appellant also referred to HMRC's Business Brief 11/10 which stated that HMRC would process "all existing claims where satisfactory evidence has been provided by 31 March 2011."

11. On 24 August 2010 HMRC’s VAT Correction Team Centralised VAT, in Belfast responded in a holding letter  to the Appellant’s letter of 13 May 2010 enclosing a copy of its HMRC Business Brief 11/10 and said that:

“HMRC’s aim is to consider all claims lodged prior to 16 March 2010 with the aim of making repayment, where appropriate, based on the criteria laid down in the Brief by 31 March 2011. …………We would appreciate your continued patience in this matter…….."   

The business brief which was issued in March 2010, referred to the full decision of the First-tier Tribunal in December 2009, which HMRC said it was appealing. HMRC said in the Brief that despite the decision it will:

“not consider any previous claims that have been rejected (for whatever reason) and which are not now under appeal. The Tribunal decision of December 2009 will be appealed to the Upper Tribunal and the previous decisions of the VAT Tribunal and the High Court are being appealed to the Court of Appeal. HMRC intends, on the basis of the findings of the VAT Tribunal and the High Court (subject to appeal) to consider those claims already received in respect of VAT on gaming machine takings. No new claims for the repayment of VAT for the period between 1 November 1998 and 5 December 2005 can be made.”

12. On 8 September 2010 the Appellant acknowledged HMRC's letter and asked HMRC to confirm that the date of submission of its claim was 20 December 2006. The Appellant also asked HMRC to confirm that it had all the information necessary in order to make repayment.

13. On 20 September 2010 HMRC's VAT Correction Team in Belfast replied to the Appellant that HMRC "are currently reviewing all gaming machine claims in accordance with the information provided in Business Brief 11/10 and aim to review all cases by March 2011."

14. On 4 October 2010 the Appellant lodged a notice of appeal with the Tribunal  together with a copy of HMRC's letter dated 17th of January 2007 rejecting the claim for a refund of VAT.

15. The reasoning behind the Appellant’s original claim is set out in its letter to HMRC of 20 December 2006. The Appellant argued that article 13B(f) of the Directive could be relied upon by an operator of gaming machines before the UK courts to prevent the application of rules of national law which were inconsistent with that provision. HMRC's response of 17 January 2007 was not as clear as it could have been because it referred to the UK not applying different VAT liabilities to identical gaming machines, whereas the issue implicit in Linnewebber and in Rank Group Plc, the lead case against HMRC being taken through the UK courts, was whether there had been unequal treatment of similar gaming machines governed by different parts of the Gambling Act which were treated differently for VAT purposes prior to 6 December 2005.

16. Some explanation of the background to the Rank case is necessary, to understand the context of HMRC's response. Rank Group Plc during the period October 2002 to December 2005 operated slot machines covered by sections 31 and 34 of the Gaming Act 1968. Income from these machines was taxable under UK domestic law as income from a ‘gaming machine’. Rank claimed that similar machines operated by its competitors were exempt from VAT in particular machines operated under section 16 of the Lotteries and Amusements Act 1976 and section 21 of the Gaming Act 1968 and FOBT’s which were both similar and in competition with the taxable machines. Rank said this was a breach of the principle of fiscal neutrality which precludes treating supplies which are similar and in competition with each other differently for VAT purposes. The Tribunal's provisional view at the first stage of Ranks appeal was that there was a prima facie breach of the principle of fiscal neutrality. HMRC argued that the differences between the regulatory regimes covering the allegedly similar machines, prevented them from being similar for the purposes of the principle of fiscal neutrality. Dealing with factors alleged by HMRC to show that the supplies were not similar, the Tribunal held that differences in respect of the maximum stake, maximum winnings and game rules applying to, on the one hand, Ranks machines, and on the other hand exempt machines, were not relevant. The Tribunal reasoned that it could be taken from the ECJ’s election not to answer this point in the Linnewebber case, that it must not have considered these to be relevant, but rather considered that the supplies were, despite any differences in these respects, ‘the operation of the same activity’. The Tribunal's judgment was upheld by Norris  J in June 2009.

17. Following an appeal by HMRC, the Court of Appeal and the Upper Tier Tax Tribunal decided that they require input from the ECJ to decide the outcome of the Rank case. The ECJ decision may not be delivered until late 2012 and in consequence the Tribunal in this case has issued directions to the effect that this appeal be stayed until 60 days after the Rank Group Plc case is finally resolved.

18. The time limit for the Appellant to make an appeal was 30 days after the making of HMRC's decision on 17 January 2007.  The time for appealing was prescribed by rule 4 of the Value Added Tax Tribunal Rules 1986 (SI 1986/590).  It is for the Appellant to show good reason why the Tribunal should exercise a discretion to allow an appeal to be made outside that time limit.

19. The appeal for which permission is sought has been lodged over 3.5 years after the initial refusal of the claim by HMRC and over 1 year after the second claim, which was also rejected.  It is therefore considerably out of time. The Tribunal nevertheless has to consider the application in the context of the overriding objective of the Tribunal, as set out in rule 2 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, which requires cases to be dealt with fairly and justly in the circumstances. This involves a balancing exercise having regard to the respective interests of the parties. Furthermore having regard to the correlation between the overriding objective with that in rule 1.1 of the Civil Procedure Rules (CPRs), in the exercise of its discretion the Tribunal should have regard to the list of factors set out in CPR 3.9 (1) to be considered by the court when exercising discretion to extend any time limit. So far as is material in this case those factors are:

a.  the interests of the administration of justice;

b. whether the application for relief has been made promptly;

c. whether the failure to comply was intentional;

d. whether there is a good explanation for the failure

e. …………..

f. whether the failure was caused by the party or his legal representative

g. ………….

h. the effect which the failure to comply had on each party; and

i. the effect which the granting of relief would have on each party.

Other material factors must be considered including whether the Appellant has a prima facie case.

20. Mrs Tilling for HMRC argued that it is not in the interests of administration of justice to admit the appeal. The original refusal of the claim was made in January 2007 but it was not until October 2010 that the appeal was lodged. In the notice of appeal the Appellant submits that it had not been advised of the time-limits for either requesting a review of HMRC’s decision or submitting an appeal to the Tribunal. Mr. Buchan for the Appellant said that HMRC's letter of 17 January 2007 was not clear enough in terms of advising the Appellant of its right to appeal to an independent Tribunal and the procedure for doing so. He says that HMRC's manual recognises taxpayers as customers and that they should therefore be given proper guidance. Mrs Tilling contends that it is not incumbent upon HMRC to advise an Appellant on how to go about appealing to the Tribunal. Mr Buchan had earlier explained to the Tribunal that ‘cold call’ letters had been received from a VAT and Customs Duty consultancy in February and May 2006 which first alerted him to the possibility of claiming a VAT refund on gaming machine takings. It is not clear whether the Appellant took advice from the consultancy relating to pursuing an appeal, although Mr. Buchan did concede that advice had not been sought from the company's accountants. Therefore, although the Appellant may not have been aware of time limits for making of an appeal, applying a reasonable taxpayer test, it ought to have been aware of those time limits.

21. The notice of appeal refers to the Appellant’s claim of 20 December 2006 as a ‘protective claim’ and submits that was all that was necessary pending a ruling in the Rank Group case. That cannot however have been true in December 2006, at which stage there had been no mention of the Rank case either in the copy correspondence from the VAT consultancy produced to the Tribunal or in correspondence between HMRC and the Appellant. In fact, in evidence to the Tribunal, Mr. Buchan conceded that he had not read about the Rank case until some considerable time later. That would not of course have prevented the claim of 20 December 2006 from being a protective claim; the Appellant had provided HMRC with its reasons for the claim and a schedule of output tax in respect of which it sought a refund, but no other evidence was produced to show that output tax had been accounted for to substantiate the amount claimed. The Appellant’s letter also makes no reference to the claim being a protective claim and, if it was intended as such, he should have responded to that effect in reply to HMRC's rejection of its claim on 17 January 2007.

22. According to Mr. Buchan, the Appellant became aware of the Rank Group case following the High Court ruling in favour of Rank on 8 June 2009 which he said is what prompted the Appellant’s second letter of claim of the 17 July 2009. HMRC responded to the claim on 9 September 2009 by e-mail, but Mr. Buchan contended that an e-mail reply, being two months after a written letter of claim, was not satisfactory. He conceded that the Appellant’s e-mail address was noted on its letter headed paper and that there was no reason in law why HMRC could not correspond to that e-mail address. Mr. Buchan also acknowledged that the Appellant, albeit unaware of the e-mail response from HMRC, had not pursued the matter further until 13 May 2010, being over a year after the claim.

23. During the 2009 HMRC had issued business briefs 63/08 and 40/09 which set out HMRC's view on the decisions of the VAT Tribunal regarding the Rank case and its position generally with regard to claims for refunds of VAT. It is possible that HMRC's business brief 40/09 issued on the 14 July 09 prompted the Appellant’s second claim for a refund on 17 July 09. Nonetheless prior to that there appears to have been a conscious decision by the Appellant not to follow up its initial claim of December 2006, either by a request for a review by HMRC or by way of appeal to the Tribunal.

24. The burden of showing why the Tribunal should exercise its discretion to permit a late appeal falls on the Appellant and from the facts of the case it is clear that the failure to lodge or pursue an appeal was entirely intentional on the part of the Appellant, both in January 2007 following rejection of the initial claim by HMRC, and if that initial claim could be regarded as a protective claim, again after July 2009 following the Appellant’s second claim, there being a period of over a year following the Appellant’s request for a refund in July 2009 before it lodged an appeal in October 2010.  The Appellant had the opportunity of appealing on both occasions at the appropriate time. In those circumstances there would be prejudice to HMRC to allow the appeal to proceed.

25. For the reasons given the Tribunal refuses the Appellant’s application for permission to appeal out of time

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to rule 39 of the Tribunal procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision .is sent to that party. The parties are referred to "Guidance to accompany a decision from the First-tier Tribunal (Tax Chamber)" which accompanies and forms part of this decision notice.

MICHAEL S CONNELL

TRIBUNAL JUDGE

RELEASE DATE: 2 June 2011