BACTA response for MGD


We urgently need every BACTA member to send the response below to both of these email addresses:


26 July 2011


Machine Games Duty: Consultation

Excise and Enterprise Tax Team

Business and International Tax Directorate

HM Treasury

1 Horse Guards Road





Dear Minister


Re: Implementing a Machine Games Duty: consultation on policy design


We refer to the above consultation and incorporate by reference the response from our Trade Association, BACTA, which represents the British Amusement Industry.


A structural tax change will introduce additional complexity, compliance burden and cost and will inevitably create some ‘losers’ across and within sectors of the industry. During what is already a period of precarious economic trading, this could see further  closures of businesses, a reduction in investment, loss of jobs and loss of tax revenue for the Treasury.  In particular the proposal from your Department is likely to damage seaside towns and businesses, undermining the relief that the Prime Minister, David Cameron, has pledged to assist.  Treasury’s objective of sustainability and predictability will not be achieved.


We strongly believe that the shortened consultation period during the industry’s busiest months is wholly inadequate to provide an adequate evidence base for a fundamental change in the industry’s taxation structure.


We seek a meeting with Treasury to understand the detail of our business model, the impact of the loss of VAT exemption and why a the proposals from Treasury to introduce MGD will fail to deliver Treasury’s objectives.  We further believe there should be full accountability for Government and Officials should the warnings of stakeholders remain unheeded.


I am attaching my response to the Consultation Questionnaire below and request a meeting with Treasury to discuss the impact of the Consultation upon my business.


Please acknowledge receipt of this letter.


Yours faithfully










Questions raised in consultation document


Question 1: Two types of machine play which raise specific issues in regards to MGD are tournaments and redemption machines. Are there any other categories of machines, or machine play, for which the legislation will raise specific issues?




There are no other categories other than tournaments and redemption games which raise specific issues.  Multi- platform terminals which might present games that fall into more than one MGD category, and therefore this issue might require periodic review.  It is noted that B3A lottery terminals will be particularly vulnerable due to their current tax status in clubs.  BACTA refers to its submissions in relation to redemption machines noting that an MGD rate of anything in excess of 3% would cause removal of the product and business closures.


Question 2: It is envisaged that tournament play on machines will be excluded from MGD and that any income received from such play will continue to be subject to VAT. (i) What, if any, problems would distinguishing between tournament play and non tournament play pose? (ii) Would it be preferable to include tournament play in MGD?




Tournaments must be included in MGD at a rate of less than 3%.  Tournaments raise specific issues.  In pubs tournaments are played on SWP terminals which have both payout and non payout games.  When they are played as non payout games they will nevertheless be subject to VAT, SWPs on the other hand will be subject to MGD.  There could potentially be further confusion as some games can be played as tournament games or as single player (just for fun) games, such as the Try Tower card game.  If tournaments were excluded manufacturers would have to supply and install software modifications which would be prohibitively costly.  The other solution would be to adopt a Deloitte approach and add VAT onto all games.  To exclude MGD and create exemptions will cause burdensome administration to operators.


Question 3: Under the suggested approach for redemption machines, it is the value of prizes and the number of tickets for which they can be redeemed that are used to determine MGD liability. The tickets themselves will not be treated as having a specific value for the purposes of MGD. (i) What administrative issues or burdens would the suggested approach impose? (ii) Would you prefer if MGD liability was calculated based on valuing the tickets themselves? If so, how should the value of the tickets be determined? (iii) Do you have any suggestions for a simplified approach to redemption tickets? Any approach will need to provide a fair result, and ensure that similar machines are treated the same. We would be interested in seeing worked step by step examples of how any suggested approach would be applied for redemption machines, in particular, looking at the interaction with the VAT partial exemption calculation.




We refer to site visits conducted by BACTA members and HMRC and Treasury officials in which the complexity of dealing with redemption machines has been explained.  Further site visits are planned emphasising the need for an extension of the consultation period.  Because of the nature of the redemption product which operates like a loyalty points collection system, rather than as a gaming product, attempting to attribute values to tickets is both inappropriate and practically impossible.  The suggestion that different redemption machines should be treated differently according to payout will not work as the operator cannot determine which ticket came from which machine when used to redeem prizes.  For this reason redemption should fall within a no greater than 3% MGD rate.  It should be noted that while redemption product is not used across all business models, increasingly opportunities are being explored and eg pubs may look to flexibility by offering redemption style games. It would be necessary to ensure that a fair way is adopted for MGD purposes and this might be to tax the retail value of the prizes given out across machines at site level.  In order to address the VAT partial exemption issue, it is essential that VAT relief be provided by the ability to:

  • Offset irrecoverable VAT against MGD.
    • Seek a VAT exemption on turnover rents (treat them as distribution of profits) to avoid putting many third party family arcade operators out of business.
    • Property rents also need to be VAT exempted to avoid creating unfair competition in the high streets and seaside resorts.


Question 4: The draft legislation outlines who should have primary liability for MGD for different types of premises. Are there any commercial arrangements where the proposed approach would pose a problem? If so, how could the legislation be altered to alleviate these problems?




Liability should fall upon whoever currently pays the VAT.  We believe that the premises licence or permit holder should have primary liability for MGD.  There is a fundamental problem that a supplier could not rely upon the register as it could be possible for a site owner to deregister at any time and it would be impossible for the supplier to be aware of this or control such deregistration.  It therefore must be clear that if a supplier deals with a premises occupier who has been registered for MGD, there can be no redress back to the client if that premises occupier does not pay the duty.


We note that for clubs the imposition upon directors of joint and several liability might cause resignations and therefore a limitation of liability should be considered.

Question 5: For premises where machines are provided on the basis of an alcohol licence, the draft legislation envisages that tenants and landlords can choose who should register for MGD. (i) What, if any, problems would this pose? (ii) Would you prefer if the legislation specified where the primary liability will lie? (iii) In the absence of a choice, do you think the primary liability to pay the duty should lie with the tenant, or with the landlord?




This should lie with the tenants as they are responsible for the VAT.  As stated in the question above there is great concern that an operator might register for MGD, that registration would be relied upon by the supplier, and the premises operator then discontinues registration.  We submit that it should be sufficient that the premises operator has at any point been registered for MGD.


Question 6: Some machines may be able to provide both machine games and non machine game activities. Where that is the case, it is envisaged that only the net takings from the machine games will be subject to MGD. The takings from non machine game activities will continue to be subject to VAT.


(i)              Do you have machines which have both machine games and non machine game activities on them?

(ii)            If so, what, if any, problems would identifying the net takings from each pose?

(iii)           If identifying the exact net takings from each is not possible, the draft legislation allows for apportionment on a “just and reasonable” basis. Do you have any suggestions for a method of apportionment which would be “just and reasonable”




Note that all major SWP manufacturers have launched, or have the capability of launching, such products.  It is impossible to gather and separate data for individual games played on these terminals and to do so would involve huge technology and administration costs, potentially increasing administrative burdens by 60%.  It would be impossible to apportion on a ‘just and reasonable basis’ as any estimate would be arbitrary.  The answer is to subject all games to MGD at the lower rate of less than 3%.


Question 7: Under the draft legislation, “genuine” and “earned” free plays will be treated differently. (i) What, if any, administrative issues or burdens would this impose? (ii) Would you prefer the alternative proposal of counting all free plays towards dutiable takings, or do you have any other suggestions for how free plays could be treated?




Freeplays should not count in the MGD calculation as they have nothing to do with the cash in box.  The same applies to sundry claims for defective machines which will continue to be deducted before paying VAT.  Trying to identify what is classed as earned will be difficult in two ways.  First we will need to understand what is classes as earned, and secondly we would have to introduce time consuming and costly administrative processes to track and identify these splits at machine and customer level.  It is important especially in the arcade sector that we have the ability to market and incentivise our products using this mechanic as we are very restrictive as we cannot discount stake or increase prize.  Many of the offers that are currently used within our sector may fall into the earned free plays category, an example would be a matching offer as £5 for £5 (customer enters £5 into a machine and we match the £5 stake), this could be categorised as earned as they would have to stake 5 plays to receive 5 free plays.  But in essence this is no way any different to others in retail establishments where they do mechanics along the lines of BOGOF  “buy on get one free”. Retailers are not expected or indeed pay VAT on the free item nor should we be expected to pay MGD on the free item.  We do not prefer your alternative set out in the consultation document of counting all free plays towards dutiable takings and urge Treasury to leave them as currently non-dutiable.


Question 8: (i) What are your current net takings, per machine and category? (ii) What is the current ratio of recoverable to output VAT? (iii) What would the rate of MGD have to be to leave your business no worse off (taking into account reduced input VAT recoverability)? (iv) Would you consider that the information available from the Gambling Commission Industry Statistics 2009/10 on machine numbers and profitability is representative for the industry as a whole?



Treasury must note that information regarding a business’s net takings is a matter of the greatest commercial sensitivity.  Such information can only be made available in the context of confidential presentations by stakeholders to Treasury officials, and therefore we strongly submit that the consultation period must be extended to develop an adequate evidence base.  We believe that failure to extend the consultation period to comply with Cabinet Office guidelines and to conduct individual meetings with taxpayers, could result in any decision being made being challenged for a lack of process and reasonable analysis.

We refer to BACTA’s submission and to the report of Ernst & Young.  Based upon the modelling the only possible solution would be a 3 tier structure, VAT relief and an effective taxation scheme for offshore operators as follows:

MGD structure

  • A, B1 and B2   -  20%
  • B3, B4 and C  -  15%
  • Cranes and pushers and other Category D, skill games, novelties and redemption  –  less than 3%.

VAT relief

  • Offset irrecoverable VAT against MGD.
  • Seek a VAT exemption on turnover rents (treat them as distribution of profits) to avoid putting many third party family arcade operators out of business.
  • Property rents also need to be VAT exempted to avoid creating unfair competition in the high streets and seaside resorts.

Question 9: (i) What stakes and prize limits do your machines currently have? Do they typically reflect the maximum stake and prize limits allowed under social regulation for each category of machine? (ii) If you have machines which will be subject to MGD but which are not classified as “gaming machines”, what are the stakes and prize limits on these machines? (iii) If the limits on some of your machines were just above the threshold set for the lower rate, would it be possible or desirable to adapt the limits on existing machines to take advantage of the lower rate?




Gaming machines reflect the maximum stakes and prize limits within the Gambling Act, however some of our members also offer novelty games and SWPs which do not fall within the Act.

Question 10: Under the draft legislation, it is envisaged that the rate of duty for each machine will be determined by the highest stake and prize offered on that machine. (i) Would you prefer this approach to the alternative where the rates would be determined at the level of each game, so that some machines could be subject to the two different rates of duty? (ii) Would it be possible to account for two different rates of duty on the same machine? What administrative issues, or burdens, would that impose?




We strongly submit that any proposal for a 2 rather than 3 tier MGD structure should be rejected by every seaside town.  The structure should be as set out in the answer to Question 8 above.


It would be very complex and onerous to apply different rates on the same machine depending on age, data available, and if a monitoring system could identify the required outputs.


It would be administratively unworkable to separate machine takings into different rates of duty and applying a rate of duty based on maximum stakes and prizes may be preferable. Whilst newer machines, particularly PC based digital games, could with some effort achieve this separation of duties, older reel based analogue machines would not.


We agree that the rate of duty for each machine should be determined by the highest stake and prize offered on that machine.


Having two potential rates determined by the stake and prize offered would be unworkable as these products do not separate meters and the cost of providing them would be commercially uneconomic.  Even newer digital products do not have this facility and would not necessarily be capable of modification to provide this data.


It would not be possible to account for two different rates other than by apportionment which could only be best estimate.


Accounting for two rates from the same machine would double the amount of administration .This would slow the emptying process and mean splitting the cash box with separate dockets/cash sheet entries for each rate for each machine if the data was available.

Question 11: Under the draft legislation, persons with primary liability to pay the duty will need to register with HMRC for MGD. (i) For premises where no licence or permit exists, details of the individual premises need to be provided to HMRC. What administrative issues or burdens would this impose? (ii) If a profit sharer received takings from a machine for which no one was registered, and HMRC could not identify a person liable to MGD, any profit sharer would be at risk of being liable to MGD on their share of the profits. What administrative issues or burdens would verifying whether someone is registered impose? Do you have any suggestions for how these might be minimised?




The establishment of a publicly available internet based FREE Register would be essential as the only realistic way that a machine Operator would be able to check whether persons to whom they wish to supply machines were registered for MGD.


As referred to above, the issue of keeping the Register up to date would be a problem and imposing MGD on an Operator that has taken all reasonable steps to comply with the legislation is clearly unfair. Most databases contain errors and redundant data and an Operator will make a check at a specific point in time (eg when supply commences or on a tenancy change) and cannot be expected to keep “re-visiting” the Register for all machine supplies on an ongoing basis.  We strongly submit that provided an Operator has been registered at any point that should be sufficient to enable HMRC to track those premises and the supplier should be permitted to rely upon that registration having taken place.


Question 12: In informal discussions with HMT and HMRC, industry representatives have expressed a preference for quarterly accounting periods. Do you agree with this view? If not, what accounting periods would you prefer?




Yes, accounting should be quarterly and could be the same as the VAT return.  Special accounting periods should also be available.


Accounting periods for pubs generally operate in weeks. Therefore the accounting periods should not be fixed quarter end dates but allow flexibility.

Question 13: The current draft legislation envisages that accounting periods can in general span any three consecutive months. What, if any, problems would it cause if HMRC instead introduced fixed return periods, say March, June, September and December?




This should be the same as the VAT period although note that for small operators it might also cause the burden or preparation of a simultaneous return.


The only issue we can see if this is the case is extra administrative tasks to allocate correct sums into a variable accounting period, as above as long as special accounting period facility was available it would negate the issue.

Question 14: HMRC intends to provide a facility for special accounting periods so that the MGD accounting periods can have start and end dates which coincide with businesses’ own accounting periods, for example ending on the last Sunday of the month and starting the following day. What benefits would such a facility provide and what administrative issues, or burdens, would arise if such a facility was not available?




The effect of special accounting periods will depend upon the individual business and some operators might find the coinciding of accounting periods places them under an administrative burden.


Question 15: It is envisaged that there will be a requirement to keep records of individual machines for the purposes of MGD, but that in some circumstances, HMRC might grant a dispensation from this requirement. Do you have any views on the circumstances in which a dispensation ought to be granted?




Whilst keeping records of individual machines is not an issue for pubs which have small numbers of machines and for some very large national operators, it is problematic for the vast majority of small seaside arcades, many of which are seasonal.  We submit that there should be a specific dispensation for arcades to take account of the operational practice.  Such dispensation has been adopted by the Gambling Commission in relation to data supplied in regulatory returns.


In an arcade, eg with 200 machines, it could triple or quadruple the time taken to empty machines. At present the majority of most seaside arcades empty the cash box into a collection bucket then move to the next and empty into the same bucket, and so on, then  count the total together to account for VAT.  The new proposal from Treasury would require each machine to be emptied and counted individually, the cash taken to the counter, counted and recorded separately.  Then two meters have to be read and recorded.  Equipment to record this can be fitted to a machine at a cost of £150 per unit. In the case of a 200 machine arcade (average size) capital outlay of £30,000 plus £6,000 vat we couldn’t recover.  This cost would be prohibitive and distort competition in favour of large operators.  It would further damage the seaside sector which the Prime Minister, David Cameron, has committed to assist.


Question 16: It is estimated that the cost of completing an MGD return will be approximately £50, equating to an annual cost of £200 per business. This cost per return is broadly similar to the cost of completing other gambling taxes returns, such as general betting duty and pool betting duty returns. (However, as betting duties require monthly returns, the overall administrative burden of these duties per business is estimated to be higher than for MGD.) Do you agree with the assessment of compliance costs for MGD?




We estimate that there will be an average set up cost in excess of £1,000 and an annual fee of at least £500 per year.  It could be estimated that for pubs the administrative annual charge for the sector could be in excess of £25 million.


Question 17: Exempting the takings from machine games from VAT will change the “VAT status” of some businesses (i.e. whether businesses are fully VAT-able, partially exempt or fully exempt). The nature, and extent, of these changes will affect the estimation of compliance costs and administrative burdens. (i) Do you agree with the overall assumptions on changes in VAT status as outlined in Chapter 5?


(ii) If you are a machine operator, would you expect your VAT status to change? If so, how?




We assume that the VAT status of most of our members will not change ie they will not qualify for the VAT exemption.


Question 18: Do you agree with the overall assessment of the impacts of this change as outlined in the table in Chapter 5?




The range of estimates in the Summary of Impacts reflects the uncertainty surrounding the imposition of this new tax.

The impact assessment clearly does not recognise the impact that the imposition of MGD on games that are not currently subject to AMLD.  These include Category D, novelties, SWPs and B3A machines.

Finally, we suggest that the real focus of the Treasury when exploring gambling taxation should be designing an effective tax regime to provide the Exchequer and the British taxpayer with revenue from offshore operators.


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