Background
Eight companies in the Thomas and Noble corporate groups operated slot-machine terminals in bingo halls and amusement arcades. The terminals used random-number generators that were physically separate from, but connected by wire to, each terminal. HMRC assessed the companies for approximately £3.25 million in under-declared amusement machine licence duty for periods between December 2004 and July 2006, treating the terminals as higher-duty category E gaming machines rather than category A machines.
The companies sought relief under HMRC’s extra-statutory concessions for bona fide misunderstanding and misdirection. They relied principally on 2004 letters sent by Customs to the industry association BACTA and a published Customs manual. Those materials stated that terminals using a random-number generator that was not integral to, or was outside, the terminal were not gaming machines. HMRC rejected the concession claims, and the High Court dismissed the companies’ applications for judicial review.
The Court’s Holding
The Court of Appeal unanimously allowed the appeal concerning the misunderstanding concession. It held that interpreting HMRC policy statements is a question for the court, even though some evaluative aspects of applying a concession may primarily be for HMRC subject to rationality review. Read objectively from the perspective of an ordinarily sophisticated taxpayer, Customs’ statements used “remote” to mean physically separate or not integral to the terminal—not necessarily situated a substantial distance away.
The companies therefore had a bona fide misunderstanding of their duty liability, reinforced by clear Customs guidance, and their failure to seek machine-specific confirmation was not evidence of negligence. The other conditions of the concession supplied no rational basis for refusal: there was no knowing evasion, no guidance clearly stating the correct category E treatment, and the duty had not been and could not now be charged to customers. The court quashed the decisions insofar as they refused the misunderstanding concession, requiring HMRC to make fresh decisions. It did not decide whether the separate misdirection concession applied.
The court also admitted the previously redacted portions of an internal HMRC report. Those passages and other contemporaneous records confirmed that, during the relevant period, Customs itself treated physical separation of the random-number generator as sufficient; the distance-based interpretation emerged only later.
Key Takeaways
- Courts independently interpret published HMRC policies and guidance; HMRC cannot reserve interpretation of its own statements to itself subject only to rationality review.
- The misunderstanding concession’s threshold requirement of a bona fide misunderstanding is distinct from its four additional conditions and does not require the underlying guidance itself to create a common-law legitimate expectation.
- Customs’ references to a “remote” random-number generator meant one outside or not integral to the terminal, so operators were not negligent in relying on that guidance without seeking machine-specific confirmation.
Why It Matters
The judgment clarifies how courts should review HMRC’s application of extra-statutory concessions, particularly where relief depends on the meaning of the tax authority’s own published guidance. Although HMRC may retain primary responsibility for some evaluative judgments, interpretation of public policy statements remains a judicial function.
It also confirms that taxpayers seeking relief for a bona fide misunderstanding need not prove that the underlying official communication independently satisfied the demanding test for a substantive legitimate expectation. The decisive question is whether the concession’s own terms are met.