Changes to the tax regime on games machines in pubs and bars are increasing costs for operators and risk undermining recent government initiatives to support the leisure sector, according to analysis by BDO.
Operators of gaming machines used to pay a fixed duty (AMLD) based on the category of licence issued for each machine. Additionally, the net takings from the machines were subject to VAT on a VAT inclusive basis, which meant that 83.3% of the income was retained by the operator.
Machine Gaming Duty (MGD) replaced AMLD on 1 February 2013 and also changed the takings from the machines from VATable, to exempt. BDO says that its research shows that following the changes, the operators have immediately suffered a cost. As the takings from the machines are VAT exempt, VAT on the rental share in respect of the machines is not recoverable. Additionally, VAT on overhead costs (eg costs related to the premises in which the machines are located) is partially restricted.
As an added cost, the actual takings retained from a 20% duty machine have been reduced. For a 20% machine, the operator will retain 80% of the takings - this compares to 83.3% of income retained after VAT.
BDO says that operators who want to mitigate the impact of the changes, could consider renegotiating the revenue share agreements with owners; re-structuring the management of the machines by , for example, using a machine operating company; or looking at whether VAT partial exemption special method may increase VAT recoveries.
However, the firm calculates the majority of pub machines will still be subject to MGD at 20% rather than 5% and VAT charged on tenancies will be partly irrecoverable. It says this would appear to run contrary to the government's apparent intention to support the pub sector on issues such as the beer tie.
BDO's analysis concludes: 'The MGD changes were introduced partly in response to a number of VAT claims submitted by the pub and leisure industry in respect of gaming machine income (particularly bingo machines) as an attempt to limit the impact of these claims to the Treasury. However, in implementing these changes, there is an argument that HMRC appear to have prioritised short-term tax revenue generation over the long-term impact on the industry.'
