[2010] UKFTT 292 (TC)

TC00581

Appeal number: LON/2008/0544

VAT – electronic lottery ticket vending machine (ELTVM) – Group 4, Sch 9 Value Added Tax Act 1994 - whether a “gaming machine” – whether takings are exempt supplies within Item 2, Group 9

FIRST-TIER TRIBUNAL

TAX 

	OASIS TECHNOLOGIES (UK) LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (VAT)	Respondents

		TRIBUNAL: JUDGE ROGER BERNER
				MRS R A WATTS DAVIES MHCIMA FCIPD									

Sitting in public at 45 Bedford Square, London WC1 on 7 – 9 June 2010

Valentina Sloane, instructed by Deloitte LLP, for the Appellant

Christopher Vadja QC and Ewan West, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	This is the appeal of Oasis Technologies (UK) Limited (“the Appellant”) from a decision of HMRC dated 26 September 2007 that the takings from the Appellant’s Electronic Lottery Ticket Vending Machine (“ELTVM”) supplied by the Appellant to private members’ clubs are consideration for a taxable supply and thus liable to VAT.  The decision was upheld on 12 March 2008 following a reconsideration by HMRC.
2.	In broad outline the Appellant contends that the purchase of an electronic lottery ticket dispensed by an ELTVM constitutes the granting of a right to take part in a lottery.  Accordingly, it is said, the takings from an ELTVM benefit from the exemption in Item 2 of Group 4 of Schedule 9 to the Value Added Tax Act 1994 (“VATA”).  The case for HMRC is that for the purposes of VAT an ELTVM has at all relevant times been a gaming machine as defined in VATA, and that as such a lottery played on a gaming machine is within Item 1 of Group 4 and not Item 2.  There is no exemption within Item 1 for the provision of a gaming machine.
3.	Valentina Sloane appeared for the Appellant.  Christopher Vadja QC and Ewan West represented HMRC.
Preliminary matters: AMLD and fiscal neutrality
4.	There were two preliminary matters for our decision prior to the substantive hearing.  The first concerned the Appellants’ appeal against the statement in the HMRC decision letter of 26 September 2007 that HMRC regarded the ELTVMs as liable to amusement machine licence duty (“AMLD”).  It was accepted that the Appellant does not have a right of appeal under the Betting and Gaming Duties Act 1981.  Accordingly, that question was not pursued before us.  A number of suggestions were made as to how that issue, if not otherwise resolved, might be brought before the Tribunal.  For present purposes therefore we considered it appropriate at this stage simply to adjourn HMRC’s application to strike out that part of the proceedings.
5.	The second matter concerned the issue of fiscal neutrality which the Appellant had raised in this appeal only at the stage of skeleton argument.  For HMRC, Mr Vadja argued that it would be inappropriate and unfair for the Tribunal to determine this issue at this stage.  He argued that it would be preferable for this issue to be dealt with at a hearing where the Tribunal had a comprehensive view of the market and all the relevant ELTVM machines on that market.  Ms Sloane submitted that it would be perfectly possible at this stage for the Tribunal to consider the question of similarity, which as the law stood was the only relevant question.  However, as Mr Vadja pointed out, the question of the level of abstraction to be adopted by the national courts in determining whether products are similar is one of the issues raised in the referral by the Upper Tribunal (Tax and Chancery Chamber) of questions to the Court of Justice of the European Union (“ECJ”) in the case of Revenue and Customs Commissioners v The Rank Group PLC [2009] EWHC (Ch) 1244.  There were questions of regulatory and economic context, competition and causation potentially to be considered.
6.	We decided that fiscal neutrality had to be regarded not simply as an argument, but as a fundamental, and distinct, ground of appeal that ought properly to have been pleaded at an earlier stage of the proceedings.  In our view it could not at this stage fairly be considered in the absence of advance notice to HMRC.  We considered the arguments of Ms Sloane regarding the delay, and the need for witnesses to refresh their evidence, but concluded that, although we should seek to avoid delay, that was only if this would be compatible with proper consideration of the issues.  In our view in these circumstances we could not give proper consideration to the issue of fiscal neutrality.  Accordingly, we adjourned the consideration of that issue, subject to the outcome of this hearing.
Scope of this appeal
7.	This appeal does not concern any liability to VAT of the Appellant.  The decision of HMRC from which the Appellant appeals is not an assessment.  The Appellant lends ELTVMs to clubs free of charge, which gives rise to no VAT issue.  The Appellant also sells the clubs electronic lottery tickets, which are liable to VAT in the same way as traditional paper lottery tickets.  The Appellant has always accounted to HMRC for VAT on its sales to the clubs of both paper and electronic lottery tickets.  The issue in this appeal concerns the liability of the clubs to account for VAT, since the relevant supply is by the clubs to their members.
The facts
8.	For the Appellant we had two witness statements of, and heard oral evidence from, Mr Paul Burnell.  Mr Burnell was the managing director of the Appellant from the time of its establishment in the UK until August 2008.  He ceased to be a director of the Appellant in April 2009.  We also had two witness statements from Mr Charles Came, club treasurer of Laverstock & Ford Sports & Social Club, and one witness statement from each of Mr Peter Stevens, club treasurer of Cwmavon Social Club, and Mr Ray Coombes, club secretary of Carshalton Social Club & Institute, none of which were challenged by HMRC.  For HMRC we had a brief witness statement from Mrs Glenda Bloxham, Senior Avoidance Investigator, who issued the decision letter of 26 September 2007.  Mrs Bloxham’s witness statement was not challenged by the Appellant.
9.	In addition we had a bundle of documents, and a statement of agreed facts, which we reproduce below.  In this statement, and in the findings of fact generally, we refer, as did the parties for convenience, to games being played, and cognate expressions.  Such references are not findings of fact on our part in that regard, as the question whether a particular activity is a “game” and whether a person “plays” a game involve questions of law for this appeal.
Statement of agreed facts 
A. The Appellant
1. The Appellant (“Oasis”) was incorporated on 29 September 1997 and became registered for VAT under VAT registration number 701 2401 07 with effect from 19 December 1997.  At all material times its registered office was located at Kent Road, Bridgend Industrial Estate, Bridgend, Mid Glamorgan, CF31 3TU. 
2. Oasis is a wholly owned subsidiary of International Gamco Inc (‘Gamco’). Gamco was established in the United States in 1983 as a manufacturer of pull-tab lottery tickets.
 
B. The Dispute 
3. Oasis offered pull-tab lottery products and Electronic Lottery Ticket Vending Machines (‘ELTVM’) to the private members’ club market. It is the VAT liability of the income generated from ELTVMs that is in dispute in this appeal. 
4. The Respondents issued a decision on 26 September 2007 informing the Appellant that they considered:
(a) the takings from ELTVMs to represent consideration for taxable supplies; and
(b) that ELTVMs were liable to AMLD. 
5. On 24 October 2007 Oasis requested an Independent Reconsideration of HMRC’s decision. Oasis subsequently lodged separate Notices of Appeal against the VAT and AMLD decisions at the London Tribunal on 3 March 2008. 
6. A meeting between the parties took place on 5 November 2008 where a variety of media for dispensing lottery tickets were demonstrated by the Appellant, namely:
(i) two, slightly different, pull-tab lottery ticket dispensers;
 	(ii) an ELTVM; and
(iii) the National Lottery website.
 7. Following this meeting HMRC prepared a draft note of facts relating to the various lottery ticket dispensers.  (see Appendix 1). 

C. The Oasis Business
8. Once the ELTVM was installed on a customer site Oasis sold packs of tickets to the operator of the ELTVM. The packs were downloaded to the hard drive of the ELTVM. The ticket packs were randomised securely by Oasis prior to them being issued. 
9. The operators of the Oasis games purchased packs of tickets from Oasis. Oasis charged the operators for these tickets plus VAT at the standard rate. Regardless of whether the club sold all of the tickets within a particular game it remained obliged to purchase all of the tickets it contained. 
10. Oasis derived its income from sales of tickets for use in both ELTVMs and pull-tab lottery dispensers. 
11. Oasis provided ELTVMs to over 1,000 clubs throughout the UK.
 
D. Electronic Lottery Ticket Vending Machines
12. An ELTVM is a dispenser in which an electronic pack of a finite number of pre-drawn winning and non-winning tickets are stored. 
13. The ELTVM is a single casing terminal with a flat, touch sensitive screen about 30cm square, slightly inclined towards the customer, typically slightly higher than waist height. 
14. By inserting money into the terminal via a coin slot or note acceptor and then pressing buttons on the screen or terminal casing a customer is presented with a variety of different games to participate in. Once the particular game is chosen, i.e. by the customer touching the “PLAY” button, the ELTVM dispenses a ticket on-screen and displays the result.
15. The customer either wins a prize or not. Once a particular game is chosen, it makes no difference what the customer does. It makes no difference which particular game is chosen to the pre-determined sequence for that game. 
16. The particular symbols revealed determine whether the game is won or not. Once a game is started the screen displays the game pack serial number at the bottom of the screen. This is described as being the serial number of the particular game that the customer is participating in. If the customer wins a prize, the prize goes into a different part of the dispenser’s memory, and is displayed as a credit on the screen. 
17. The customer can choose to re-invest winnings to try and achieve a great win, in the sense that the customer can choose to continue to purchase additional tickets in the hope of winning an additional prize, either by inserting more money or by drawing on the amount credited in the dispenser’s memory. 
18. When the customer wishes to collect a prize the terminal prints what is described as a “winning ticket”. The customer presents this ticket to a member of the operator’s staff (typically the bar staff). The validity of the ticket is checked (using a serial number printed on the ticket as well as a number of other secure validation features). If valid, the member of staff exchanges it for cash to the equivalent value. 
19. Each ticket shows the price of entry, ticket pack serial/ID number and regulatory notice. Each printed ‘winning ticket’ will bear:
•	the charity or organisation’s identification (ID) number;
•	the charity or organisation’s location;
•	the promoter’s name;
•	the date and time of printing; and
•	a unique serial number for verification purposes, either at the ELTVM or via the system server. 
20. With regard to ELTVMs the club paid in arrears for tickets sold. ELTVMs were networked via a GSM modem and linked to a central server which maintained all transaction data for every pack of tickets manufactured and sold (known as the Oasis Electronic Network or “OEN”). This data was polled weekly for the sales made. The operator remained obliged to purchase the entire  pack. 
21. The OEN was a secure means of distributing the packs of tickets through a system of networked or standalone ELTVMs. The ELTVMs did not use a random number generator to randomly produce game results in accordance with a statistical prize payment percentage. Instead an ELTVM represented a delivery system for the finite pool of chances which contained a predetermined number of winners.
 22. The essential characteristics of the OEN can be described as follows.
(i) It is a computer linked delivery system. 
(ii) It provides for on the spot reporting and statistics for the operator.
(iii) Winning tickets are printed, and are redeemed by the retailer.
(iv) Each ticket has its own validation number to ensure it is legitimate and has not been altered or previously redeemed. It also has other means of identification and can be bar-coded for enhanced security. 
(v) The ELTVM can provide full accounting and other dates for every pack vended. 
23. As is the case with National Lottery “scratch cards” sold by newsagents in plastic dispensers, the Oasis games offer the customer a number of games with different entry prices (however each individual game has only one price of entry). This provides the customer with a choice regarding price. Each game, whether it is a 20p or a 50p game, will have a predetermined number of winning tickets with prize values determined by the profit value attributed to that particular game. 

E. ‘Pull-tab’ Lottery Products
24. A pull-tab dispenser dispenses pull-tab lottery tickets. A ‘pull-tab’ lottery ticket is a single folded or banded ticket or a card, the face of which is initially covered or otherwise hidden from view to conceal a number, symbol or set of symbols. A number of tickets out of every pull-tab game have been designated in advance and at random. A prize is revealed by a particular set of symbols or numbers. For the opportunity to obtain such a folded or banded ticket or card, a person pays some consideration to an operator, usually via mechanical dispenser. 
25. The essential elements of a pull-tab game comprise:
(i) a folded or banded ticket, or card;
(ii) one or more numbers or symbols on the ticket or card, concealed from view;
(iii) pre-designation of certain of the numbers or symbols as prize-winners;
(iv) prize-winners distributed at random within a set of tickets or cards; and
(v) payment of consideration for the opportunity to uncover the concealed numbers or symbols and to win any prize associated with those particular numbers or symbols. 
26. Each ticket is serially numbered with a unique number allocated to a particular game. The particular number on a ticket is not known to the customer in advance of it being dispensed. The customer is presented with a variety of games to participate in and inserts money into the vending machines and presses a button or pulls a drawer which vends a single pull-tab ticket. The customer discovers the result by peeling back windows or pulling tabs on the ticket. A win, and the amount of the win, is revealed by the alignment of the symbols revealed when the tabs are pulled back. A winning ticket is taken to the bar of the venue, the ticket is checked and retained by the bar staff and the prize is paid out. The club can check for a fraudulent ticket using the serial number on the ticket. As the tickets are pre-printed there can be no variation to the formula above. Anyone wanting to buy two pull-tab tickets simply repeats the vending process twice or more times as desired. 
27. The sale of tickets for the paper vending machines is by the box (i.e. the entire game). The game is purchased in advance of the paper tickets being put out for sale.
28. The profitability of a pull-tab game is determined by the number of tickets making up the entire game, the cost to play and the quantity and structure of the prizes to be won. The profitability is set when the tickets or chances constituting the game are produced but is only achieved once all tickets are sold, and all prizes are paid out. Anyone failing to claim a prize will increase the profitability to the promoter. 
29. As regards the pull-tab games sold by Oasis, the customer (i.e. the promoter) can chose which game to purchase. Different games have different ticket prices (e.g. 20p tickets or 50p tickets), prizes and pool size. Complex mathematics is used to determine each particular ticket making up the game and effort is put into distributing the winning tickets randomly through all the tickets making up the game. This process starts with the order of printing. After printing, the tickets are stacked individually in piles, with three piles about 40cm high, stored in a sealed box. Typically one box containing between 2,500 and 5,000 tickets will make up an individual game however this can be any number of tickets depending on the size and/or value of the specific game. Boxes of tickets are sold to customers, and no refunds on part sold games are permitted. 
30. Human intervention with the tickets after printing is kept to a minimum, partly for security and partly to avoid the chance of people making mistakes. The packaging process uses ways of further randomising the distribution of the tickets within the ticket stack in a box. Boxes of tickets are sold to customers, and no refunds on part sold games are permitted.
31. There is nothing to prevent the promoter selling packs of  tickets from which some of the tickets can be sold behind the bar with others sold via pull-tab dispensers. 
32. Pull-tab lottery tickets are similar in nature and design to the National Lottery scratch cards that can be purchased at most high street newsagents.
10.	Paragraph 7 of the statement of agreed facts refers to a note, at Appendix 1 to the statement, prepared by HMRC, of the demonstration meeting on 5 November 2008.  That note is itself agreed between the parties, but we do not reproduce it here as it overlaps to some extent with the agreed statement, and no specific reference was made to its contents in the course of the hearing.  Part of the demonstration was of machines dispensing, or vending, pull tab lottery tickets.  We have not found evidence in relation to such vending machines material to our decision in this appeal.  Nor are the references in the Appendix to the National Lottery website of any evidential value.
11.	In Appendix 1 reference is made to the types of games that may be played on the ELTVM, some of which have additional features which make no difference to the outcome of the lottery (either win or lose), but which are designed to enhance the enjoyment of the game (for example, by using sound).  The simplest game is described as the display of a virtual lottery ticket on the screen, with the player rubbing part of the screen with his fingers, revealing symbols underneath in much the same way as for physical lottery tickets where the results are revealed by pulling the tab or scratching the card.  We viewed this process through a demonstration DVD, which was produced for marketing purposes.  The DVD was produced in the United States for the US market, but we heard in Mr Burnell’s evidence that the machine shown in the demonstration had been manufactured in the UK and had been available on the market and on-site in the UK until 2007 or 2008.
12.	The ELTVM terminal contains an electronic memory and a modem link, which allows the download of lottery tickets comprised of finite pools of predetermined tickets into the memory.  The terminal works by accessing the lottery ticket results in sequence once the customer presses “play”.  The information in the memory combined with the hardware and operation of the software in the terminal is a straight electronic analogy to a stack of pull tab tickets in a pull tab terminal as the tickets are dispensed one by one sequentially by the vending machine in order to dispense them to the customer.  There is no randomising of the results; the sequence is predetermined on download. 
13.	The ELTVM typically offers a range of games.  We heard from Mr Burnell that this could be more than twelve.  Each game would give the player access to a separate lottery, and there would typically be a number of lotteries at different price levels (for example, 20p and 50p), and with different prize structures.  Each separate lottery has a predetermined number of winning tickets with the prize value attributed to that particular lottery.  The inherent characteristics of a traditional lottery are maintained.  There is no change in stake; for a lottery the price is fixed.  Both pull-tab lotteries and the ELTVM are “finite pool lotteries”.
14.	The agreed note in Appendix 1 also refers to so-called “blended lotteries” in which there is a single lottery with both paper tickets and electronic tickets provided by the ELTVM.  However, in his evidence Mr Burnell said that such a blended lottery had only ever been put in place in the UK on a trial basis.  Mr Vadja argued that as there had been no actual supply for VAT purposes by means of a blended lottery we should disregard this evidence.  Whilst we agree that the issues before us can only be considered in the context of the use of the ELTVM on a stand-alone basis, and not in conjunction with a paper lottery, we do not consider the evidence of how a blended lottery might work to be irrelevant.  Accordingly, we have had regard to the evidence of the blended lottery, although we do not regard it as material to our decision.
15.	In his evidence Mr Burnell explained in some more detail the operation of the ELTVM.  He was asked to describe the way a particular game – “Jungo Bingo” – worked.  The sequence he described was as follows:
(1)	When the terminal is not in use a screen saver would appear, which includes an explanation that the machine was for lottery games.
(2)	The player would insert 20p into the slot.
(3)	Icons representing all available games would be displayed (including those requiring a 50p stake, but it would not be possible to select a 50p game unless at least 50p was credited to the player).
(4)	The player would select one of the icons, in this instance “Jungo Bingo”.
(5)	The “Jungo Bingo” artwork would appear on the screen.  This showed a representation of a virtual bingo card and, on the right hand side of the screen, a box containing spaces for coloured balls.
(6)	The player could then choose from a number of buttons to press.  If he chose “Auto” (which might also, in a given game, be designated “Fast Play”), the effect would be to accept the card that is displayed.  The result of the lottery is shown automatically.  Not all games would have an Auto or Fast Play button, especially those employing slots or reels, where the actual game itself would take only a few seconds.
(7)	If the player presses “Play” a number of balls fall from the top of the screen into the right-hand box.  If a number on the card corresponds to a number that has been drawn it will be highlighted in red and, if the ticket is a winning one, then it will be displayed as a winner.  If it is a losing ticket, then no win is received or credited.
(8)	If the player wins, the amount of the winnings is credited to a credit meter, which is displayed on the screen.  The player can either collect those winnings (by printing out the ticket and redeeming it with the club) or use them to play again.
(9)	There are various other on-screen buttons.  A Help button can be pressed for information on how to play the game.  A Menu button takes the player back to the screen showing the icons for the choice of game.  If the Collect button is pressed the player can collect his winnings.
(10)	A separate “Change Card” button may also be pressed, which changes the numbers on the bingo card selected (but without altering the chance of the player, as the result has by that time already been predetermined).
16.	We also heard from Mr Burnell about the features of another game, “Treasure Island”.  That game enabled the player to press a button or icon in order to roll an imaginary dice.  The dice would show a number and the player, represented by an animated person, would move that number of spaces along a trail.  This could happen on a number of occasions, possibly three or four, before either reaching a piece of gold or the like (for a winning ticket) or falling into a hole (a losing ticket).  This secondary animation was described by Mr Burnell as entertainment.  In the course of this description it also emerged that the game would time out if the player did not touch anything for a certain period (12 to 15 seconds); in that event the result of win or loss would simply be displayed on the screen.
17.	The placing of game features, or secondary animations such as those we have described, was to enhance the entertainment value of playing the ELTVM.
18.	Mr Burnell produced in evidence marketing material which referred to ticket prices of up to £1 and prizes of up to £2,000.  In cross-examination Mr Burnell first identified this material as dating from 1996-97.  However, later in his evidence, he corrected this, saying instead that from 1997, when the Appellant started operations, until late 2006 or early 2007 the Appellant operated at £500 maximum jackpot.  Mr Vadja put to Mr Burnell a copy of other marketing material that had been extracted on 7 June 2010 from the Appellant’s website.  This showed a maximum jackpot of £500 and maximum stake of 50p.  It also had a photograph of a machine of a type different from that displayed in the exhibit to Mr Burnell’s witness statement and that we had seen demonstrated in the DVD.  The machine in the photograph produced by Mr Vadja had fixed artwork with the words “Win Jackpot” surrounding the active screen on which the games would be displayed, and we understand from Mr Burnell that there were three or four different fixed artwork styles.  Mr Burnell’s evidence on this marketing material was somewhat confused.  It was unclear whether the material exhibited to his witness statement was of an earlier or later time to the material extracted from the website.  In the light of the fact that, as we shall describe a little later, it was in 2007 that the regulations introduced, with machines such as the ELTVM in mind, a sub-category B3A machine with a maximum prize of £500, we find on the balance of probabilities that the material describing the £2,000 prize must have pre-dated the material that described the £500 prize.  However, in our view nothing turns on this.  Mr Burnell confirmed that the only difference between the two types of machine was the casing; the internal operation was the same.  All the ELTVMs provided to clubs by the Appellant operated in the way described above.
19.	Mr Burnell referred in his witness statement to the need for all clubs, in order to comply with their respective constitutions, to obtain the approval of the club committee for the installation of the ELTVM.  He said that the committee would discuss the proposal and would then have to approve the installation and operation of the machine.  Only once the committee had authorised the operation of the ELTVM would the Appellant site the machine.  Mr Burnell’s understanding was that the decision to site the machines was ordinarily documented in writing in the form of minutes of the committee meeting.  Mr Burnell was challenged on this part of his statement by Mr Vadja in cross-examination.  In answer to a question whether there were any written authorisations to the promoters of the lotteries, Mr Burnell could refer only to the agreement between the Appellant and the club.  However, we find that that agreement, a standard copy of which we reviewed, did not contain or confirm any such written authorisation.
20.	The only other reference to written authorisation was in the unchallenged witness statement of Mr Came.  He said in his statement that as promoter of the lottery at his club he was provided with the authority to promote that lottery to club members (or their guests when on the club’s premises) by the club committee.  That decision, he stated, would have been documented in the contemporaneous minutes of the committee meeting at which it was made.  However, the Appellant was unable to produce any documentary evidence of this authorisation.  In the circumstances, we are unable to make any finding of fact that such a written authorisation was, or was not, given.  Whilst leaving open the possibility that, so far as it is material, an individual club might be able to produce such evidence, we assume for the purpose of this appeal that there were no such written authorisations.
21.	The witness statements of Mr Came, Mr Stevens and Mr Coombes were all expressed as seeking to explain how, in their respective experience, ELTVMs were perceived from the point of view of the Appellant’s customers.  We considered these statements, none of which was challenged by HMRC, carefully but concluded that there was very little in them that was material to our decision that was not already dealt with in the statement of agreed facts, in Appendix 1 to that statement or in the evidence of Mr Burnell.  The general tenor of this evidence was that younger customers were more interested in playing the ELTVM than older ones, who tended to play the traditional pull-tab lottery, and that gaming machine players tended to be a separate group from those who played the ELTVM.
22.	We ought, however, to refer to one passage from the witness statement of Mr Coombes that puzzled us a little.  Mr Coombes said:
“The ELTVM offers entertainment to the customer before ultimately dispensing an electronic lottery ticket.  For example there is a game called ‘Spider’s Web’ whereby the player moves a graphical spider around its web on the machine’s touch screen which determines the lottery ticket which is selected.”
23.	We find this puzzling because on its face it contradicts what is agreed to be the actual position.  The fact is that the electronic lottery ticket is dispensed before the entertainment and not, as Mr Coombes’ evidence suggests, after it.  Furthermore, we have the impression from Mr Coombes’ description of the ‘Spider’s Web’ game that he at least had the perception that the movement of the spider around the web could determine the selection of the lottery ticket, when this is not the case.  The ticket would be dispensed in the way described by Mr Burnell, and not in dispute, that is in a predetermined order once the Play button had been depressed.  The movement of the spider, or any other feature, could not affect the result.  We do, however, find that Mr Coombes’ description does represent his own perception of the ELTVM and of this particular game.
Documentary evidence
24.	In reaching our decision on the issues before us we have considered the documents that were helpfully provided to us in the bundle.  In addition to the oral and DVD evidence on the operation of the ELTVM, we have taken account also of the independent descriptions contained, in particular, in the summary of lottery terminals produced by the Gambling Commission on 6 September 2006 and in the Machine Standards Category B3A document of June 2008, also published by the Gambling Commission, which refers to gaming machines using “pseudo games” to display the result of a lottery ticket which is recognisably a known game (for example, poker, reels or bingo) and where, if it is described as such by title or visual representation (Jungo Bingo would be an example), it must be made clear to the player that the chances of winning in the lottery differ from an equivalent real game and that the outcome of the “game” is totally dependent upon the result obtained from the next chance drawn from the class.  “Pseudo game” for this purpose is defined as follows:
“A portrayal of a game which is used to display the outcome of a lottery chance.  This is a display method only and nothing done within the game may affect the outcome of the lottery chance.”
25.	We should also refer particularly to Chapter 28 of the  Department for Culture, Media and Sport (DCMS) Gambling Review Report of July 2001 on lotteries, which stated (at para 28.52):
“Any interactive or electronic lottery play that is not the straight sale of a ticket will look, to the layman, like gaming (whether on a gaming machine in a pub or club, or virtual gaming on the internet).  We believe that it will be essential for such activity to be subject to the same approval and regulation as gaming machines and virtual gaming.  The only real difference between the two is that the proceeds of the lottery games go to good causes rather than for commercial profit.”
26.	Ms Sloane referred us to the VAT and Duties Tribunal (Chairman, Mr Colin Bishopp) decision in Prize Provision Services Limited (No E00902) at para 30, where the tribunal made the point that, although the tribunal was not bound by the views of the Gaming Board, it should not lightly dismiss the opinion of the regulatory body for the gaming industry, who must be taken to be experts in this field.  We share this view.  However, we consider the present case to involve questions of statutory construction and the application of the relevant provisions, so construed, to the particular facts of this case.  Whilst therefore we have had due regard to the views of the Gambling Commission and the DCMS, as expressed in the documents we have seen, we have based our decision on what we consider to be the proper construction of the statutory provisions in question and the application of those provisions to the facts of this case. 
The law
27.	Article 135 of the Council Directive of 18 November 2006 (2006/112/EC) (“the Principal Directive”) provides that member states shall exempt certain transactions from VAT.  Among those transactions are:
“(i) betting, lotteries and other forms of gambling, subject to the conditions and limitations laid down by each Member State”
28.	The exemption is provided for in UK legislation by Group 4 of Schedule 9 VATA.  For the period from 1 April 2006 to 31 October 2006, Items 1 and 2 of Group 4 read as follows:
“1. The provision of any facilities for the placing of bets or the playing of any games of chance. 
2. The granting of a right to take part in a lottery.”
For that period, Note (1) to Group 4 provided that:
“Item 1 does not include …
(d) the provision of a gaming machine.”
29.	From 1 November 2006 to the present, Item 2 remained unchanged, but Item 1 was amended, and read:
“1. The provision of any facilities for the placing of bets or for the playing of any games of chance for a prize.”
For the same period, Note (1)(d) was also amended, and read:
“Item 1 does not include …
(d) the provision of anything which is a gaming machine for the purposes of section 23 [VATA]”
The issues
30.	There are two issues for us to consider in relation to exemption from VAT under Group 4.  The first is whether the ELTVM is a “gaming machine” within the meaning of Note 1(d) for the relevant periods.  The second is whether, if the ELTVM is a gaming machine, the consequence is that its provision is not an exempt supply, but is standard-rated.
31.	For HMRC to succeed we must find both that the ELTVM is a gaming machine, and that the exemption does not apply.  The Appellant’s primary argument is that, whether or not the ELTVM is a gaming machine, the relevant supplies are exempt as the granting of a right to take part in a lottery under Item 2 of Group 4, and that the exclusion for gaming machines does not therefore apply.  Furthermore, the Appellant submits that the ELTVM is not in any event a gaming machine within the meaning of that term in Group 4.  HMRC argue that the ELTVM is a gaming machine and that a lottery that is played on a gaming machine is not within Item 2, and so is not exempt.
32.	As the VAT legislation has been amended during the period which is the subject of this appeal, we must consider the circumstances over two separate periods.  It was agreed during the hearing, on the basis of the evidence of Mrs Bloxham, that the earliest period of assessment for VAT on the takings of any ELTVM provided by the Appellant would not be before April 2006.  Accordingly, we have divided our analysis into two periods: the first from 1 April 2006 to 31 October 2006, and the second from 1 November 2006 to the present.
33.	Analysis of the issues we have to decide involves consideration of both the applicable VAT law and also, by reference, the relevant social legislation.  As regards the social legislation, it was accepted by HMRC that the ELTVM constitutes a lottery, but, as we have described and as we shall explore in more detail later, it was not accepted that the arrangements constituted the grant of the right to participate in a lottery for the purposes of Item 2 of Group 4 VATA.
Issue (1): Is the ELTVM a “gaming machine”?
Period 1 April 2006 to 31 October 2006
34.	In this period, and indeed from 6 December 2005, the definition of “gaming machine” for the purposes of Item 1 of Group 4 was provided by Notes (3) to (6) to Group 4.  Those Notes read as follows:
“(3) “Gaming machine” means a machine which is designed or adapted for use by individuals to gamble (whether or not it can also be used for other purposes).
(4) But—
 (a)     a machine is not a gaming machine to the extent that it is designed or adapted for use to bet on future real events,
 (b)     a machine is not a gaming machine to the extent that—
 	(i)     it is designed or adapted for the playing of bingo, and
(ii)     bingo duty is charged under section 17 of the Betting and Gaming Duties Act 1981 on the playing of that bingo, or would be charged but for paragraphs 1 to 5 of Schedule 3 to that Act, and
 (c)     a machine is not a gaming machine to the extent that—
(i)     it is designed or adapted for the playing of a real game of chance, and
(ii)     the playing of the game is dutiable gaming for the purposes of section 10 of the Finance Act 1997, or would be dutiable gaming but for subsections (3) and (4) of that section.
(5) In Notes (3) and (4)—
 (a)     a reference to a machine is a reference to any apparatus which uses or applies mechanical power, electrical power or both,
 (b)     a reference to a machine being designed or adapted for a purpose includes a reference to a machine to which anything has been done as a result of which it can reasonably be expected to be used for that purpose, and
 (c)     a reference to a machine being adapted includes a reference to computer software being installed on it.]1
(6) “To gamble” means to participate in—
 (a)     gaming within the meaning of section 6 of the Gambling Act 2005, or
(b)	betting within the meaning of section 9 of that Act.”
35.	It was common ground that, by virtue of Note (3), the fact that a machine might be used for purposes other than gambling does not preclude it from being a gaming machine.  Thus, the mere fact that the ELTVM grants the right to participate in a lottery would not preclude it from being a gaming machine, if it otherwise satisfies the definition of that term.
36.	The question we have to consider is whether the ELTVM is, in the terms of Note (3), a machine which is designed or adapted for use by individuals to gamble.  The only question in this regard is whether the opportunity afforded by the ELTVM falls within Note (6)(a) as “gaming”, it being accepted that the ELTVM does not involve any form of betting within Note (6)(b).
37.	In order to consider this question we must refer to certain parts of the social legislation under the Gambling Act 2005 (“GA 2005”).  Note (6)(a) refers to section 6 GA 2005, which provides as follows:
“6 Gaming & game of chance
(1) In this Act “gaming” means playing a game of chance for a prize.
(2) In this Act “game of chance”–
(a) includes–
(i) a game that involves both an element of chance and an element of skill,
(ii) a game that involves an element of chance that can be eliminated by superlative skill, and
(iii) a game that is presented as involving an element of chance, but
(b) does not include a sport.
(3) For the purposes of this Act a person plays a game of chance if he participates in a game of chance–
(a) whether or not there are other participants in the game, and
(b) whether or not a computer generates images or data taken to represent the actions of other participants in the game.
(4) For the purposes of this Act a person plays a game of chance for a prize–
(a) if he plays a game of chance and thereby acquires a chance of winning a prize, and
(b) whether or not he risks losing anything at the game.
(5) In this Act “prize” in relation to gaming (except in the context of a gaming machine)–
(a) means money or money's worth, and
(b) includes both a prize provided by a person organising gaming and winnings of money staked.
(6) The Secretary of State may by regulations provide that a specified activity, or an activity carried on in specified circumstances, is or is not to be treated for the purposes of this Act as–
(a) a game;
(b) a game of chance;
(c) a sport.”
38.	Section 14 GA 2005 defines “lottery”:
“14 Lottery
(1) For the purposes of this Act an arrangement is a lottery, irrespective of how it is described, if it satisfies one of the descriptions of lottery in subsections (2) and (3).
(2) An arrangement is a simple lottery if–
(a) persons are required to pay in order to participate in the arrangement,
(b) in the course of the arrangement one or more prizes are allocated to one or more members of a class, and
(c) the prizes are allocated by a process which relies wholly on chance.
(3) An arrangement is a complex lottery if–
(a) persons are required to pay in order to participate in the arrangement,
(b) in the course of the arrangement one or more prizes are allocated to one or more members of a class,
(c) the prizes are allocated by a series of processes, and
(d) the first of those processes relies wholly on chance.
(4) In this Act “prize” in relation to lotteries includes any money, articles or services–
(a) whether or not described as a prize, and
(b) whether or not consisting wholly or partly of money paid, or articles or services provided, by the members of the class among whom the prize is allocated.
(5) A process which requires persons to exercise skill or judgment or to display knowledge shall be treated for the purposes of this section as relying wholly on chance if–
(a) the requirement cannot reasonably be expected to prevent a significant proportion of persons who participate in the arrangement of which the process forms part from receiving a prize, and
(b) the requirement cannot reasonably be expected to prevent a significant proportion of persons who wish to participate in that arrangement from doing so.
(6) Schedule 2 makes further provision about when an arrangement is to be or not to be treated for the purposes of this section as requiring persons to pay.
(7) The Secretary of State may by regulations provide that an arrangement of a specified kind is to be or not to be treated as a lottery for the purposes of this Act; and–
(a) the power in this subsection is not constrained by subsections (1) to (6) or Schedule 2, and
(b) regulations under this subsection may amend other provisions of this section or Schedule 2.”
39.	Section 17 GA 2005 applies where an arrangement falls within both the definition of a “game of chance” in section 6(2) and that of a “lottery” in section 14.  So far as is material, section 17 provides as follows:
“17 Lotteries and gaming
(1) This section applies to an arrangement which satisfies–
(a) the definition of a game of chance in section 6, and
(b) the definition of a lottery in section 14.
(2) An arrangement to which this section applies shall be treated for the purposes of this Act as a game of chance (and not as a lottery) if a person who pays in order to join the class amongst whose members prizes are allocated is required to participate in, or to be successful in, more than three processes before becoming entitled to a prize.
(3) An arrangement to which this section applies shall, subject to subsection (2), be treated for the purposes of this Act as a lottery (and not as a game of chance) if–
…
(b) it satisfies paragraph 10(1)(a) and (b) of Schedule 11,
…
(4) Any other arrangement to which this section applies shall be treated for the purposes of this Act as a game of chance (and not as a lottery).
…”
40.	Paragraph 10 of Schedule 11 GA 2005 sets out the conditions that need to be satisfied if a lottery is to be a “private society lottery”.  Paragraph 10(1) (which is referred to by section 17(3)(b)) provides:
“(1) A lottery is a private society lottery if –
(a) it is promoted only by authorised members of a society, and
(b) each person to whom a ticket is sold is either a member of the society or on premises wholly or mainly used for the administration of the society or the conduct of its affairs (“society premises”).”
Certain expressions used in paragraph 10(1) are defined by paragraph 10(2) and (3) as follows:
“(2) In this Part “society” means any group or society established and conducted for purposes not connected with gambling.
(3) In subparagraph (1)(a) “authorised” means authorised in writing by the society or, if it has one, its governing body.”
41.	Ms Sloane submitted that there was a significant difference between the definition of gambling in the social legislation and that in the VATA.  In both cases a gaming machine was defined as a machine designed or adapted for use by individuals to gamble.  We have seen this for VAT purposes in Note (3) to Group 4; in the social legislation the relevant provision is in section 235(1) GA 2005, and is in identical terms.
42.	However, and this was the material difference to which Ms Sloane referred, “gambling”, which is the pre-requisite in each case for a machine to be a gaming machine, is defined in the social legislation as betting, gaming and participating in a lottery: see s 353(1), s 3 GA 2005, whereas, as we have seen, there is no express reference to participation in a lottery in the definition for VAT purposes of “gambling” in Note (6) to Group 4.  Ms Sloane suggested that in consequence of this distinction, firstly, and which was not in dispute, under the social legislation a lottery terminal that offers participation in a lottery (even if it offers no other form of gambling) is “gambling” and so is a gaming machine, but secondly that under VAT legislation the very same machine does not offer “gambling” and so is outside the definition of a gaming machine for those purposes.
43.	We do not share this analysis.  For VAT purposes the fact that the definition of “gambling” does not expressly encompass lotteries, but refers to betting and gaming has the effect of excluding from that definition only something that is a lottery but is not at the same time betting or gaming.  Anything that is encompassed within “gaming” (it being agreed that betting is irrelevant) within the meaning of section 6 GA 2005 is treated as gambling for the purposes of Group 4 even if it is also a lottery.  We would agree with Ms Sloane that anything which is not betting but is a lottery, and which falls outside the definition of gaming in section 6 GA 2005, would not be within the meaning of “gambling” for the purposes of Group 4, but that is not the case for a lottery which also falls within the meaning of gaming in section 6.
Construction of section 6 GA 2005
44.	It is clear from section 17 GA 2005 that, in the context of the social legislation, the provisions of GA 2005 regarding gaming (section 6) and those regarding lotteries (section 14) are not mutually exclusive.  This supports HMRC’s position that it is possible for a particular activity to constitute at the same time both a lottery and a game of chance.  But, as Ms Sloane pointed out, it is still necessary, before section 17 can apply, for the activity first to satisfy the definition of game of chance within the meaning of section 6.  Section 17 itself does no more than illustrate that a lottery arrangement can be a game of chance for section 6 purposes as well as being a lottery within section 14, at least before section 17 itself operates as a tie-breaker.
45.	Ms Sloane did not place any reliance on section 17.  Her case was that the ELTVM did not constitute gaming within section 6.  However, as the point did come out in argument, we should set out here our own view of the relationship between section 6 and section 14, and how we consider this can affect the construction of “gambling” within Note (6) to Group 4.
46.	Mr Vajda argued that section 17 was not relevant to the meaning of gambling in Note (6) to Group 4, as Note (6) referred to, and incorporated by reference, only section 6 itself, and section 17 was not referred to or imported for the purpose of the VAT legislation.  We do not agree with Mr Vajda on this for the following reasons.
47.	It is in our view significant that section 17 does not refer to the arrangement as being gaming within section 6, but takes as its starting point the definition of “game of chance” in section 6.  This is only one of the elements required in order that something constitutes gaming, the others being that the game must be played and that it must be played for a prize.
48.	What we consider this means, in terms of statutory construction, is that, in determining whether something that satisfies the definition of a lottery within section 14 is in fact gaming within section 6, the first step is to consider if the arrangement satisfies the section 6 definition of “game of chance”.  If it does, the next step is to apply section 17, as that provision determines whether the arrangement is a lottery or a game of chance.  If it is a game of chance, and not a lottery, then it falls to be considered whether the arrangement satisfies the definition of gaming in section 6 taken as a whole.  Accordingly, section 17 must, in our view, be applied before it can be concluded whether the lottery arrangement is or is not a game of chance.  Only if it is a game of chance by virtue of section 17 will it potentially, subject to satisfaction of all the elements of section 6, qualify as gaming within the meaning of that section.  Section 6 cannot therefore, for the purposes of Note (6) to Group 4, be regarded in isolation from section 17.  Section 17 operates, in circumstances of a lottery within section 14, to define one of the conditions of section 6, and accordingly its meaning.  If something is excluded from being a game of chance by virtue of section 17, then in our view it cannot be gaming within section 6, and so cannot be “gambling” within Note (6) to Group 4 VATA.
49.	On this basis, under section 17, a lottery which would otherwise have satisfied the definition of a game of chance in section 6, is not a game of chance if it is, under paragraph 10(1) of Schedule 11 GA 2005, promoted only by members of a non-gambling group or society who have been authorised in writing by the society or its governing body and either tickets are sold only to members or on society premises.
50.	As we have described above, there is no evidence before us that such written authorisations have been effected, although it remains possible that in individual cases that may be the case.  We assume for the purposes of this appeal that there are no such authorisations.  If there were to be such evidence in a particular case, our view is that this would prevent the arrangements being games of chance and thus as being gaming within section 6; and that for the purposes of Note (6) to Group 4 the meaning of section 6 falls to be construed with section 17.
The ELTVM and “gaming”
51.	We now turn to the consideration of whether the ELTVM is designed for use by individuals to participate in gaming within the meaning of section 6 GA 2005.  This requires an analysis of the conditions in section 6 that must be satisfied.  But we should first consider an argument raised by Ms Sloane based on the nature of a particular sub-category of gaming machine, the Category B3A machine, under the Categories of Gaming Machine Regulations 2007 (2007 No 2158).
52.	Under GA 2005 lottery ticket vending machines were exempted from the broad definition of “gaming machine” under section 235(1) of that Act, provided that the results of the lottery were not determined by the machine and were not communicated by the machine without there being an interval of a duration to be specified by the Secretary of State (see s 235(2)(d)).  The interval was specified as one hour by paragraph 2 of the Gambling (Lottery Machine Interval) Order 2007 (2007 No 2495).  This interval of one hour was set following consultation following publication by the Government of a consultative paper in March 2007.
53.	During the consultation it emerged that there were a number of clubs that were offering machines, including the ELTVM, that would be caught by the proposed interval order.  These machines, which operated under section 4 of the Lotteries and Amusements Act 1976 and were offered as private lotteries for non-commercial gain, at that time frequently had a stake of up to £2 and a prize of a maximum of £2,000.  Whilst expressing concern that such high-prize gambling should be available only in casinos under GA 2005, the Government accepted representations that these machines were an important source of revenue for non-commercial clubs and accordingly provided for an additional sub-category (Category B3A) of machine that from the regulatory aspect would be brought within the definition of “gaming machine” in section 235 GA 2005.  Category B3A was limited to gaming machines that only enabled participation in a lottery (and not any other form of gambling) and that were made available by a members’ club or a miners’ welfare institute.  They must have a maximum stake limit of £1 and a maximum prize limit of £500.
54.	We were shown a copy of a letter dated 12 June 2009 from the then Minister for Sport, Richard Caborn MP, to the President of BACTA, the organisation that represents the British amusement industry.  We conclude from this that it was of concern to the Government that lottery machines regulated under section 14 of the Lotteries and Amusements Act 1976 were being offered by clubs that had all the appearance of high prize gaming machines.  The purpose of the introduction of the one-hour interval between the entry into the lottery and the announcement of the result was to ensure that lottery vending machines were not used to provide fast-draw, rapid play gaming.  It was in response to representations made, including those by the Appellant, to the effect that lottery ticket machines would be commercially unviable as a result of the one-hour interval, that the new gaming machine Category B3A for lottery machines was created.
55.	Ms Sloane argued that the ELTVM does not offer any form of gambling other than participation in a lottery.  That, she said, was a statutory requirement of a Category B3A machine under the Categories of Gaming Machines Regulations 2007, regulation 5(3), which provides:
“A machine is a sub-category B3A machine if-
(a) it enables a person to participate in a lottery but not in any other form of gambling;
(b) it is made available for use by a members’ club or a miners’ welfare institute;
(c) the maximum charge for use is no more than £1;
(d) the maximum prize value is no more than £500; and
(e) it is not a sub-category B4 machine or a Category C or D machine.”
56.	Ms Sloane argued that the ELTVM satisfied the conditions for a Category B3A machine, and that since such a machine by definition could not offer any form of gambling (within the meaning of GA 2005) other than participation in a lottery, it followed that the ELTVM could not be offering gaming within section 6 GA 2005.
57.	Mr Vadja made the perfectly valid point that the 2007 Regulations post-dated the first period which we must consider.  However, on the evidence, we take the view  that, as regards the question whether the ELTVM offered gaming in the first period, the circumstances were the same before and after the entry into force of the 2007 Regulations.  Ms Sloane’s argument would therefore be equally applicable to both periods at issue in this appeal.
58.	Having said that, we do not accept Ms Sloane’s arguments on this point.  It seems to us that the definition of a Category B3A machine as being confined to enabling participation in a lottery and not any other form of gambling cannot be determinative, on the facts before the tribunal, as to whether a particular machine, with its particular characteristics, was designed for individuals to participate in gaming, which is the requirement under Notes (3) and (6) to Group 4.  As we have described, lotteries and games of chance are not mutually exclusive under the GA 2005, but if something can be both, section 17 GA 2005 operates as a tie-breaker.  So it will only be if the lottery machine either does not involve arrangements that can fall within the definition of “game of chance” within section 6 GA 2005, or does do so but is nevertheless classified as a lottery (and not as a game of chance) by virtue of section 17, that the B3A sub-category will be available.  The fact that a Category B3A machine must be a lottery machine and not involve gaming does not therefore of itself determine whether the participation it offers falls within the meaning of game of chance in section 6.  It could do so, but be excluded from being treated as a game of chance by one of the exclusions in section 17.  And if it does fall within the definition of game of chance, and satisfies the other requirements of section 6, it will only be if it is treated by section 17 as a lottery and not as a game of chance that it will thereby be taken outside the definition of gaming and qualify as a Category B3A machine.  For the purpose of this appeal, no such exclusion applies.
59.	Accordingly, under section 17(4) any arrangement which satisfies both the definition of lottery and the definition of game of chance, must be treated as a game of chance.  We must therefore consider whether the arrangements involving the ELTVM satisfy that definition.
Section 6 GA 2005
60.	For a machine to be a gaming machine within Note (1)(d) to Group 4, it must be designed or adapted for use by individuals to gamble.  For that purpose, as we have described, “to gamble” means in this context to participate in gaming within the meaning of section 6  GA 2005.
61.	Section 6 sets out a number of conditions that must be satisfied before it can be said that something is “gaming”.  It is necessary to determine:
(1)	if there is a game of chance;
(2)	if a person plays a game of chance; and
(3)	if the person plays a game of chance for a prize.
62.	“Prize” for this purpose includes money or money’s worth, which is clearly satisfied by the cash prize offered by the participation in the ELTVM lottery.  The three conditions must nevertheless be considered individually to determine whether the ELTVM is designed for use to participate in gaming within section 6.
Game of chance
63.	   Section 6(2) GA 2005 does not provide an exhaustive definition of “game of chance”.  It is clarificatory, making clear, for example, that something that would otherwise be a game of chance will not be prevented from being so by the presence of an element of skill, or even superlative skill.  Mr Vadja did not argue that the lottery participation offered by the ELTVM constituted a game of chance as its ordinary meaning would be understood.  He relied instead upon section 6(2)(iii), arguing that the ELTVM provided games that were presented as involving an element of chance.
64.	Miss Sloane argued that certain effects on the ELTVM, such as scratch card and pull-tab effects, could not sensibly be described as “games” at all, as those were merely a means of revealing a result, whether on paper or on a computer terminal.  For other categories of so-called games, for example Jungo Bingo, which we have described in our summary of the facts, it was equally obvious that a game of bingo was not being played or simulated; in the case of Jungo Bingo itself the player does no more than watch balls being matched with a card.  Furthermore, even where a game has a secondary feature which allows the player to prolong the display, for example (as we have seen with Treasure Island) by throwing a dice or (as in Spider’s Web) by moving an object, that has no effect on the outcome as a winning or losing ticket.
65.	We do not consider that the limited scope of the player’s activity can determine whether what the ELTVM provides should or should not be regarded as a game.  There is no definition of “game” in section 6, and so we must construe this term according to its ordinary meaning.  There is no single meaning that can be attached to this term.  According to the Shorter Oxford English Dictionary, it can variously be regarded as meaning an amusement, fun or sport, or as meaning a diversion, whether or not one in the nature of a contest played according to rules and decided by superior skill, strength or good fortune.  We consider that this demonstrates that “game” has a wide meaning, to be construed according to its context.  In the context of a definition of “gaming” we conclude that everything that was provided by the ELTVM for an individual participant can fairly be described as a diversion or game.  We find that all the effects, from the scratch cards and pull-tabs, through the graphic displays such as Jungo Bingo, to the interactive effects such as Treasure Island and Spider’s Web, are “games” within the meaning of section 6.
66.	Implicit in Mr Vajda’s reliance solely on section 6(2)(iii) (game presented as involving an element of chance) is an acceptance on the part of HMRC that the games provided by the ELTVM do not themselves involve an element of chance.  The element of chance is in the pre-determined order of the electronic lottery tickets that have been loaded onto the machine.  Mr Vajda argued that the games offered by the ELTVM were presented as involving an element of chance.  It was submitted that were that not so, it would be necessary to demonstrate that the game was one in which the only determining factor was the skill of the player.
67.	We do not accept this submission.  It does not seem to us to be the case that, having regard to its ordinary meaning, a game necessarily has to be presented as one involving either chance or skill.  However, nor do we accept Ms Sloane’s contrary argument that section 6(2)(iii) is confined to cases where a player is misled by the presentation of the game into thinking that he can win by either chance or skill or perhaps a combination of the two.  It is not in our view necessary that any player is misled or whether or not the intention is to mislead.  The test is purely an objective one of presentation.
68.	We have had regard to all the evidence, both oral and documentary, from the Appellant and independently, including the DVD evidence, the photographs of the machines in their various forms, and the descriptions of the operation of the machines and their effects and features.  We share the view urged upon us by Ms Sloane that the games are properly described by the Gambling Commission as “pseudo games”, but we also consider that the ELTVM falls within the description of the DCMS Gambling Review Report as an interaction or electronic lottery play that is not the straight sale of a ticket, and that this will appear to the layman as gaming.  It is immaterial for this purpose that the game itself does not provide the chance, and it is equally immaterial that the machine, in its screen saver, declares that it is a lottery.  Each of the visual representations, from the display of virtual tickets that can be electronically scratched of pull-tabbed to the poker or bingo games or games involving the rolling of dice or other interactive features, is in our opinion, viewed objectively, a game that is presented as involving an element of chance.  Each game is, accordingly, a “game of chance” within the meaning of section 6(2) GA 2005.
Plays
69.	Having concluded that all games presented by the ELTVM are games of chance, we must move to consider whether the individual can be said to “play” the game.  Section 6(3) requires only that a person “participates” in a game in order to be treated as playing the game.  We agree with Ms Sloane that the language of “Play” or “Fast Play” that is used in particular games cannot be determinative, but it does not have to be.  No element of actual play is needed; merely participation.  We hold therefore that the individuals using the ELTVM do “play” a game of chance for section 6 purposes.
For a prize
70.	Ms Sloane argued that the requirement of section 6(4) was not satisfied in the circumstances of the ELTVM.  Under that section a person is regarded as playing a game of chance for a prize if he plays such a game and thereby acquires a chance of winning a prize.  She argued that the game is not the means of acquiring the chance of winning a prize; that chance is acquired when the lottery ticket is purchased.  She submitted that the chance is acquired whether or not the player plays the game.
71.	The terms of section 6(3) do not require there to be any actual game playing in the ordinary sense.  Where there is no actual element of chance in the game itself, section 6(4)(a) is satisfied where a person participates in a game that is presented as involving the element of chance and by that participation acquires a chance of winning a prize.  There are a number of occasions when a player can be said to participate in the ELTVM games; the introduction of money into the slot, the selection of a game from one of the icons presented on screen, and the pressing of a button to play the game or reveal the result.  Each of these in our view is sufficient participation to constitute the playing of the game of chance for the purposes of section 6(3).  It is not in our view correct to regard a person as playing the game only after the relevant button has been pressed, so that the element of chance has by that time been displaced.
72.	On this analysis of the way in which a person participates in or “plays” the ELTVM games, we can clearly conclude that the chance of winning a prize is acquired by that participation.
73.	We find that the chance is acquired by a combination of the introduction of money to the machine, the selection of a game (which selects the lottery to be played) and the pressing of the appropriate button (whether “Play”, “Fast Play” or “Auto” or otherwise), which downloads the next virtual lottery ticket from the pre-loaded pack.
74.	For these reasons we conclude that the ELTVM is a machine designed for use by individuals to participate in gaming within the meaning of section 6 GA 2005, and so is a “gaming machine” within Note (3), and consequently Note (1)(d), to Group 4 of Schedule 9 VATA.
Period 1 November 2006 to present
75.	With effect from 1 November 2006, Group 4 of Schedule 9 VATA was amended so as to remove the reference to section 6 GA 2005.  Instead, Note (1)(d) reads:
“Item 1 does not include …
(d) the provision of anything which is a gaming machine for the purposes of section 23 [VATA].”
76.	For the relevant period, and up to the present time, section 23, so far as is material to the meaning of “gaming machine”, reads as follows:
“(4)     In this section “gaming machine” means a machine which is designed or adapted for use by individuals to gamble (whether or not it can also be used for other purposes).
(5)     But—
(a)     a machine is not a gaming machine to the extent that it is designed or adapted for use to bet on future real events,
(b)     a machine is not a gaming machine to the extent that—
(i)     it is designed or adapted for the playing of bingo, and
(ii)     bingo duty is charged under section 17 of the Betting and Gaming Duties Act 1981 (c. 63) on the playing of that bingo, or would be charged but for paragraphs 1 to 5 of Schedule 3 to that Act, and
(c)     a machine is not a gaming machine to the extent that—
(i)     it is designed or adapted for the playing of a real game of chance, and
(ii)     the playing of the game is dutiable gaming for the purposes of section 10 of the Finance Act 1997 (c 16), or would be dutiable gaming but for subsections (3) and (4) of that section.
(6)     For the purposes of this section—
(a)     a reference to gambling is a reference to—
(i)     playing a game of chance for a prize, and
(ii)     betting,
(b)     a reference to a machine is a reference to any apparatus which uses or applies mechanical power, electrical power or both,
(c)     a reference to a machine being designed or adapted for a purpose includes a reference to a machine to which anything has been done as a result of which it can reasonably be expected to be used for that purpose,
…
(f)     “game of chance” includes—
(i)     a game that involves both an element of chance and an element of skill,
(ii)     a game that involves an element of chance that can be eliminated by superlative skill, and
(iii)     a game that is presented as involving an element of chance, but does not include a sport,
…
(h)     “prize”, in relation to a machine, does not include the opportunity to play the machine again,
(i)     a person plays a game of chance if he participates in a game of chance—
(i)     whether or not there are other participants in the game, and
(ii)     whether or not a computer generates images or data taken to represent the actions of other participants in the game.”
77.	It can readily be seen that the legal test for what qualifies as a gaming machine for the purposes of Group 4 changed very little as a consequence of the amendments to Group 4 and section 23.  The basis definition of “gaming machine” in section 23(4) is identical to that in the former Note (3) to Group 4.  There is no cross-reference to the meaning of gaming in section 6 GA 2005, which means that the link, on our analysis, with section 17 GA 2005, no longer applies.  But the basic definition of “gaming” as playing a game of chance for a prize in section 23(6)(a) is the same as that in section 6(1).  “Game of chance” is to be construed in identical fashion by section 23(6)(f) as under section 6(2), subject to the fact that there can be no exclusion by virtue of section 17.  The same construction is in each case placed on the expression “plays a game of chance” (s 23(6)(i) VATA; s 6(3) GA 2005).  Apart from the absence of the link to section 17, the only difference of substance is the omission in the section 23 definition of any aid to the construction of “for a prize”; there is no specific reference to the link required between the playing (or participating) in the game and the acquisition of the prize.
78.	We do not consider these differences are material to our conclusion as regards this later period.  In our view, the analysis for the later period is the same as that we have concluded for the earlier period.  The ELTVM is a “gaming machine” for the purposes of section 23 VATA, and accordingly is a “gaming machine” within Note (1)(d) to Group 4 of Schedule 9 VATA.
Issue (2): Is the provision of the ELTVM an exempt supply under Group 4, Schedule 9 VATA?
79.	It was common ground that, for regulatory purposes, the ELTVM constitutes the granting of a right to take part in a lottery within section 14 GA 2005.  The Appellant’s case is simple: the ELTVM falls within Item 2 of Group 4 of Schedule 9 VATA which exempts “the granting of a right to take part in a lottery”.  Although under the Principal VAT Directive the member states can impose conditions and limitations with respect to such an exemption, in contrast to the limitation on the scope of Item 1 by the exclusion from that particular Item of the provision of a gaming machine, the exemption under Item 2 has not been subjected to any specific conditions or limitations.  There are therefore, the Appellant says, no relevant conditions or limitations to consider.  In particular, the UK has not specified that, in order to benefit from the exemption, a lottery must be provided by particular means, for example by paper tickets rather than by electronic tickets.  The fact that the ELTVM provides lottery tickets by electronic means is accordingly irrelevant.  Such tickets qualify as an exempt supply in the same way as the paper tickets dispensed by manual dispensers.
80.	Ms Sloane submitted that, in this respect, the default position under EC law is that lotteries and other forms of gambling are exempt.  Ms Sloane referred us to Finanzamt Gladbeck v Linneweber; Finanzamt Herne-West v Akritidis (joined cases C-453/02 and C-462/02) [2008] STC 1069.  In those cases the essential question before the ECJ was whether the provision in the Sixth Directive corresponding to Article 135 of the Principal VAT Directive had direct effect in the sense that it could be relied upon by an operator of games of chance or gaming machines before national courts to prevent the application of rules of national law which are inconsistent with that provision.  It was held that the relevant article (Art 13B(f) of the Sixth Directive) had direct effect.  The Court said (at paras 34 and 35):
“34. As regards more specifically art 13B of the Sixth Directive, it is apparent from the case law that, whilst that provision undoubtedly confers upon the member states a discretion as regards laying down the conditions for the application of certain of the exemptions it provides for, a member state may not rely, as against a taxpayer who is able to show that his tax position actually falls within one of the categories of exemption laid down in the directive, upon its failure to adopt the very provisions which are intended to facilitate the application of that exemption (see Becker [Becker v Finanzamt Münster – Innenstadt (Case 8/81)] [1982] ECR 53, para 33).
35. It must be added that the fact that art 13B(f) of the Sixth Directive confirms the discretion which the member states have by specifying that they have the power to lay down the conditions and limitations to which the exemption for games of chance and gambling is subject, is not such as to call that interpretation into question. Since those games are, as a rule, exempt from VAT, any operator of such games can directly rely on that exemption provided that the member state concerned has waived the power expressly conferred on it by art 13B(f) of the Sixth Directive or has failed to exercise that power.”
81.	Mr Vajda did not accept that exemption was the default position.  He referred us to the opinion of the Advocate-General (Bot) in Leo-Libera GmbH v Finanzamt Bucholz in der Norheide (Case C-58/09), which had not been reported in English but of which we received an unofficial English translation.  In paragraph 29 of his opinion the Advocate-General said:
“By providing that gambling shall be exempt from VAT ‘subject to the conditions and limitations laid down by each Member State’, without any other directions, the Union legislator clearly wished to leave it to each Member State to determine as necessary the forms of gambling that were to be subject to VAT, without conditions being imposed on that discretion as regards the category to which they belong (betting, lotteries or other), their number in relation to the number of forms of gambling allowed or the proportion of turnover they represent.”
Mr Vajda argued that Linneweber did not assist the analysis as it had not been argued that either Item 1 or Item 2 were in breach of the Directive.  The argument was that ELTVM fell within Item 1 as a matter of UK law (and not Item 2).
82.	We accept Ms Sloane’s submission that in these circumstances the default position under the Directive is exemption.  It is clearly the case that member states have a discretion to set such conditions as they think fit in this regard (subject to not contravening any other principle of EU law), but to the extent that limitations or conditions are not imposed, the direct effect of Article 135 is to require there to be a mandatory exemption.  Although in general terms the ultimate default position, absent specific provision for exemption, is that supplies within the scope of VAT are taxable supplies, where exemption is provided for by the Directive, subject to conditions and limitations to be laid down in domestic law, the result is that, in default of such conditions or limitations, exemption must be applied.
83.	In support of his proposition that the ELTVM is not within Item 2 of Group 4, Mr Vadja relied upon the decision of the VAT and Duties Tribunal in George McCann trading as Ulster Video Amusements (BEL/85/86) [1987] VATTR 101, in which it was held that the legislative intent to tax the takings from the provision of gaming machines by expressly excluding them from the relief granted under Item 1 would be defeated if they could nonetheless be included by implication under Item 2.
84.	In Ulster Video Amusements the business of the appellant was that of providing, controlling and taking the receipts from amusement and gaming machines.  Most of the machines were for the playing of games such as ‘Star Wars’ or ‘Space Invaders’ or the like.  To provide further income for the Ulster Social Sports and Leisure Club in Belfast the appellant provided ten fruit machines on its premises for use only by its members.  The appellant collected the profits from the machines and the club took a proportion of those profits to fund certain of its activities.
85.	For the appellant in Ulster Video Amusements it was contended that, whilst many of the machines were admittedly gaming machines, some of them were a “lottery” as well.  Exemption was claimed under Item 2 of Group 4 (which was identical under the law applicable to Northern Ireland to the provisions at issue in this appeal).  For the Commissioners it was argued that “lottery” can have different meanings in different legislation.  For the purposes of VAT the legislative intent was to tax the takings from gaming machines at the standard rate.  The word “lottery” as used in Item 2 does not therefore include a gaming machine.
86.	The tribunal (HH Judge Rowland QC, Chairman) reviewed the then applicable regulatory regime for lotteries and concluded that if the case had fallen to be decided under the legislation relating to unlawful gaming he would have been prepared to hold that each of the machines in question was capable of being a lottery.  But he held (at page 110) that the relevant regulatory statutes:
“… are not in pari materia with value added tax legislation, and where Acts are not in pari materia, it is fallacious to take the construction which has been put upon one as controlling the construction of another.”
87.	The chairman went on to say that the appeal had to be determined according to the proper construction to be put on the applicable VAT legislation and “the primary rule is that the sense of the words is to be adopted which best harmonises with the context and promotes in the fullest manner the policy and object of the Legislature.”  The tribunal found that under Group 4 there were three activities that were to be exempt, namely betting, gaming and lotteries, and went on (at page 110):
“There are certain exclusions from these reliefs.  One is where a club provides such facilities as games of chance to its members on payment of their subscription but without further charge.  Another, and this is the relevant one, is that the provision of a gaming machine is not to be included in the exemption accorded to ‘playing a game of chance’.  In the present appeal it was the business of the Appellant to provide gaming machines in these and other premises and also amusement machines in other premises.  It was from this business that he derived his income and profits; he was the person who made taxable supplies and thus was a taxable person for the purpose of Section 4 of The Finance Act 1972 and who was required to register and did register for the purpose of value added tax.  He was assessed on the totality of the takings from the machines which he owned and controlled.  It would appear to have been the clear intention of the Legislature to tax the takings from the provision of gaming machines by expressly excluding them from the relief granted under item 1.  To hold that they can nevertheless be included by implication under item 2 as ‘lotteries’ would be to defeat the legislative intent.  I therefore hold that for value added taxation purposes the provision of a gaming machine does not come within the expression ‘the granting of a right to take part in a lottery’ in item 2 of Group 4.”
88.	Mr Vajda argued that if (as we have found) the ELTVM is a gaming machine it is caught by Item 1.  He says that the relevant distinction is between lotteries played on gaming machines, which are subject to Item 1, and lotteries which are not provided on a gaming machine, which are subject to Item 2.  He submits that this simple logic is the basis for the decision in Ulster Video Amusements and that the decision in that case is clearly correct and should be upheld in its application to the facts of this case.  In reliance on Ulster Video Amusements Mr Vajda argued that the legislative intent was to tax gaming machines.  That intent would be defeated if a machine that otherwise fell squarely within the terms of the exception in Note (1)(d) were then exempted because it might also be said to involve the grant of the right to participate in a lottery.
89.	Ms Sloane argued that the decision in Ulster Video Amusements was both materially different on its facts to those in this case and she respectfully submitted that it was based on unsound reasoning.  She argued that the decision effectively re-wrote the legislation, as its effect was to imply an exception for gaming machines from the Item 2 exemption for lotteries.  This was based on legislative intention, but, argued Ms Sloane, the only clear intention of the legislature is to exclude gaming machines from the exemption insofar as they are used for betting and games of chance.  There is no clear intention discernable from Group 4 to exclude machines insofar as they are used for lotteries.  On the contrary, the omission of any equivalent exclusion of machines from the exemption for lotteries indicates that the intention was precisely the opposite.
90.	We are not bound by Ulster Video Amusements.  We are nonetheless mindful that we ought to have due regard to that decision in reaching our own conclusions on the point at issue in this appeal.  We agree with Ms Sloane that the facts of Ulster Video Amusements are different from those in this case; in particular, it is clear, and it has been accepted that, for regulatory purposes the ELTVM is a lottery machine which, as we have found, also falls within the definition of “gaming machine” for VAT purposes, whereas in Ulster Video Amusements the machines in question were admittedly gaming machines which the tribunal concluded it would be prepared to hold, under the legislation applicable to unlawful gaming, as being “capable of being a lottery”.  The context was a business that comprised the provision of gaming machines and amusement machines.
91.	The tribunal in Ulster Video Amusements based its decision on legislative intention.  It found that, on the facts of that case, firstly that the clear intention of the legislature was to tax the takings from the provision of gaming machines from the relief granted by Item 1.  That, with respect, was clearly correct in the context of the gaming machines in question in that case.  The tribunal then held that it would defeat that legislative intention if the machines in question could be included by implication under Item 2 as “lotteries”.  Once more, on the facts in Ulster Video Amusements, we can understand why the tribunal took that view.  However, we consider that Ulster Video Amusements was not deciding any general principle of construction of Items 1 and 2, but is properly understood as a case on its own facts.  We do not consider that any general principle can be derived from that case.
92.	On the facts of this appeal, we can find no corresponding legislative intention.  The ELTVM is a lottery machine and in our view clearly falls within the terms of Item 2.  We do not consider that the legislature intended such a lottery machine to be excluded from exemption by reason of the fact that it also satisfies the definition of a gaming machine and falls within Item 1.  On the basis of the plain words of Group 4, the intention of the legislature, in accordance with the Principal VAT Directive and the Sixth Directive before it, is to provide exemption for the granting of a right to take part in a lottery, whether or not that is provided by means of a gaming machine.  Had it been the intention to exclude lottery machines that are gaming machines from the exemption in Item 2, provision to that effect could have been made, as a condition or limitation permitted by the Directive.  In our view, express provision to that effect is required, and it cannot be treated as included by implication.  The only effect of the exclusion from Item 1 of gaming machines is that Item 1 itself cannot provide exemption.  Item 2 nevertheless can provide exemption for supplies that fall within its terms.  We find that, on the facts of this case, the ELTVM does fall within Item 2, and accordingly that the supplies that it provides are exempt supplies.
Decision
93.	In summary:
(1)	As regards Issue (1), for each of the periods in question we find that the ELTVM is a “gaming machine” within Note (1)(d) to Group 4 of Schedule 9 VATA; and
(2)	As regards Issue (2), the ELTVM falls within Item 2 of Group 4 of Schedule 9 VATA, and the supplies that it provides are exempt supplies.
94.	For the reasons we have given, we allow this appeal.
Costs
95.	At the commencement of the hearing we directed that, these proceedings being “current proceedings” for the purpose of Schedule 3 to the Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009, pursuant to paragraph 7(3) of that Schedule Rule 29 of the VAT Tribunals Rules 1986 should apply, and that Rule 10 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 should be disapplied.
96.	We order the Respondents to pay the Appellant’s costs, to be assessed if not agreed. 

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.

ROGER BERNER

TRIBUNAL JUDGE
RELEASE DATE: 1 July 2010