The new Machine Games Duty is a brand new tax and not just a replacement for VAT on games machines. Rob McCann of the VAT people explains the potential VAT costs thanks to the new tax.
A new tax is rarely cause for celebration but the new Machine Games Duty (MGD) may prove particularly expensive for VAT purposes. MGD replaces Amusement Machines Licence Duty from 1 February 2013 and VAT will not be due on takings from the same date, for those machines within the new regime.
Which Machines are Affected?
Essentially, any machines which offer a cash prize greater than the cost to play will be subject to MGD. The new Duty does not apply to games that offer ONLY non-cash prizes, such as crane machines or similar, or where the player cannot hope to do more than recover the cost to play.
Affected venues will include:
- Amusement arcades
- Casinos with slot machines
- Pubs and social clubs
- Holiday parks or other similar venues
There are some quite specific exceptions, such as where the game is played at a “not-for-profit” event, such as for charity.
What are the Rates of MGD?
- 5% reduced rate where the maximum stake per game is 10pence and the cash prize is no more than £8
- 20% standard rate which applies in all other cases.
What’s the Difference for VAT?
While the rates are remarkably similar to the VAT standard and reduced rates, the simple point is, it’s not VAT and from 1 February 2013, the takings will count as “exempt” supplies for VAT purposes. This has potentially far-reaching consequences for the licence-holder who is making the supply, as Rob McCann of the VAT People explains.
“Many businesses will operate only a small number of machines as part of a larger business – typically public houses, clubs and similar venues. This will mean that most of their takings – wet and dry sales – will remain subject to VAT. A proportion of their takings will now be exempt and this could be the first time that they have to deal with the VAT Partial Exemption regime.
Partial Exemption means potentially having to restrict the amount of VAT the business can reclaim on its costs, which may be an unwelcome surprise for some businesses – particularly where property or premises are involved.”
How Partial Exemption Works
As regards sales, VAT will be due on normal supplies and no VAT will be due on the takings from machines caught by the new MGD.
For VAT purposes, costs (and the VAT thereon) are split into three categories:
- VAT on costs which are wholly attributable to supplies which are entirely taxable. A club will typically have a wide range of costs relating to the supply of meals, drinks, etc., which have VAT on them – this will be fully recoverable as normal.
- VAT on costs relating to exempt supplies – ignoring any other potentially exempt supplies, then the costs relating to exempt supplies will basically be the cost(s) of either hiring or buying the games machines. From 1 February, these costs will not normally be recoverable.
- VAT which cannot be allocated specifically to VAT’able or exempt supplies – typically overheads such as premises costs, heat and light, intangible services such as professional fees and cleaning costs, is separated out. Some of it can be reclaimed, usually in proportion to the business’ total takings from taxable supplies. But the VAT that is attributed to exempt supplies, in this example by reference to the amount of takings from gaming machines in relation to total sales income, will be lost.
“The idea behind the Partial Exemption calculation is quite simple but it can also be time consuming for businesses with lots of different costs to decide how to categorise each expense. There is also a “de minimis” threshold: if the exempt turnover is less than half of the total turnover, and the VAT costs in relation to exempt supplies are quite modest, then ALL of the VAT can be reclaimed – even the element that relates to exempt supplies.
This calculation exercise is undertaken each VAT quarter but strictly the quarterly calculation is just provisional and an annual calculation is also required to cater for seasonal fluctuations. But this is not the end of the story: if a business has bought a property in the last few years – or spent a lot of money on an existing property – then it could find that the Machine Games Duty will cost them a lot of VAT.”
Capital Goods Scheme
Businesses will often pay VAT when they buy commercial property and many will reclaim the VAT immediately, as they are making wholly VAT’able sales. But for (land and) property costing more than £250,000, the reclaimed VAT is only provisionally repaid by HM Revenue & Customs, and there is an effective ten-year “probationary period”: for each of those ten years, up to a tenth of the VAT originally reclaimed can be clawed back by HM Revenue & Customs, depending on how much exempt activity the business has undertaken in the year. Similar rules apply where £250,000 or more is spent merely on extending or refurbishing an existing property.
“All businesses need to be aware of the implications of the Capital Goods Scheme: it doesn’t apply just to the change from VAT to Machine Games Duty – and it doesn’t apply only to property but also to some other high-value assets, such as computer equipment, ships and aircraft. It can catch businesses out sometimes when, a few years after buying or extending an existing property, they decide to let out spare office space or similar.
In terms of the introduction of the Machine Games Duty, the businesses that stand to lose most in VAT are those whose business is mainly the provision or operation of machines caught in the scope of the new Duty: essentially their supplies are soon going to change over from being at least mostly VAT’able, to mostly or wholly exempt. If those businesses have also spent £250,000 or more on property in the last few years, they need to provide for a potentially significant clawback of the VAT they presumably claimed at the time.”
Managing the Transition from VAT to MGD
There are some special rules that apply for businesses buying and incurring VAT costs on machines within the scope of the new MGD regime, as follows:
- Machines bought before Finance Act 2012 was passed on 17 July 2012 can have all of their VAT reclaimed.
- Machines bought between 17 July 2012 and 1 February 2013 when the new MGD regime formally commences will be dealt with under the Partial Exemption rules and the VAT will be apportioned between exempt and VAT’able sales
- Machines bought from 1 February 2013 will have no VAT reclaimable on the basis that they will be entirely caught by the new MGD regime.
A final warning from Rob McCann:
“Businesses buying machines between 17 July 2012 and 1 February 2013 need to remember that the quarterly VAT Partial Exemption calculations are provisional and are subject to the annual calculation. Depending on when that comes around, they may have to adjust the VAT they’ve reclaimed in previous quarters.
The introduction of the new Machine Games Duty is often more complex than machine operators realise. Some brewery chains are handling the calculations centrally for all of their venues but many businesses will have to do their calculations themselves.
In particular, businesses that may be caught out by the Capital Goods Scheme clawback of VAT claimed on property in the last few years may have a particularly substantial VAT cost without realising it. In some cases there are things that can be done to avoid or reduce that clawback and of course we’d be happy to help businesses who stand to benefit from specialist advice in this area.”
For details of the Machine Games Duty registration requirements, please see Reminder: Machine Games Operators have Until 11 January to Register for New Tax