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Betting Duty Reforms- Budget 2001

Contributed by Caroline Maxwell
06 March, 2001

In the run-up to the budget, there was frenzied speculation in the UK's gambling industry about the exact nature and extent of betting duty reforms, but nobody seemed to be in any doubt that change was afoot, and it was no surprise that the chancellor announced that general betting duty will be replaced with a Gross Profits Tax by 1 January 2002. (It is important here to make the distinction between gaming duty, which is already charged as a percentage of the casino's 'gross gaming yield', and betting duty, which at present applies to all UK off-course/site bets.) Although the chancellor failed to address the issue of betting duty in his 2000 budget, he did signal his intention to consider the issue further.

In light of the mass exodus of UK bookmakers to offshore jurisdictions, and the rapid growth in on-line betting, Gordon Brown obviously decided that the matter was sufficiently pressing to be addressed; in last year's pre-budget report, he stated that: 'The government's objective… has been to assess the scope for a modernisation of General Betting Duty that would deliver a business environment in which the British betting industry can compete in both the domestic and international markets' adding that he believed that 'there is scope for a modernising reform… to deliver this objective.'

At present, onshore betting in the UK attracts a 9% deduction on winning wagers. The bulk of this is betting duty which brings the government around £479 million per year, and the remaining £50 million goes to the racing industry as levy payments. However, punters using an offshore bookmaker such as Victor Chandler are only subject to a 3% 'administration' charge, half of which goes towards the cost of the free telephone service, with the remainder being returned to British racing as a voluntary levy.

UK bookies had been calling for reform for years, but Mr Brown's failure to address the issue of betting taxation in March 2000, combined with the reduction of Irish betting duty from 10% to 5% in 1998 sparked the nation-wide departure of bookies, led by none other than Victor Chandler himself. Mr Chandler said at the time that the decision was a 'commonsense commercial' one, observing that 'Anyone with any sense is not going to bet and pay 9 percent deductions when they can pay 5 percent.'

By locating in lower tax jurisdictions, Victor Chandler, William Hill, Ladbrokes, Coral, Stanley Leisure, the Tote, and the countless other UK bookmakers that followed in their wake hoped to gain a much-needed competitive edge over onshore enterprises - in an environment as intensely competitive as the international gambling sector, tax-efficient financial management strategies can determine whether a business sinks or swims. But while the online and telephone bookies (and their customers) have been reaping the benefits of lower taxation, the exodus has cost the government almost £50 million in lost betting duty over the past year, a situation which the treasury clearly felt could not be tolerated.

Despite the departures, the industry hoped that Mr Brown would act decisively to halt the drain away from the UK in his budget, believing that such a move would help to establish Britain as an internationally competitive location for betting firms. 

Although the chancellor played his cards close to his chest in the run-up to the budget, he did give some indications that the most likely move would be the replacement of betting duty levied on customers with a 15% tax on bookmakers' gross profits, conditional on the repatriation of the major players to the UK, which has in fact turned out to be the case.

In the short term, this move will initially cost the Treasury between £150m and £200m, but the medium and long term consequences of betting duty reform should be beneficial both for the betting industry and the government itself, as it will encourage the growth of betting in the UK (pre-budget predictions suggested that turnover would increase 25-50% in the year following a reform), which will allow the Exchequer to recover its position, but with the industry stronger than ever.

With American and Australian regulators still dithering over internet gaming, modernisation of the tax will also allow the UK the opportunity to take first mover advantage as a strongly regulated betting and gaming jurisdiction. In the US, the gambling situation is tricky, as legislation varies tremendously from state to state, with permissive Nevada at one end of the scale, and Massachusetts, where any company allowing a local citizen to gamble could have their assets frozen, at the other. Although in the long term it may prove difficult to enforce, the Kyle Bill, which was passed in 1999 and aims to prevent internet gambling altogether, dealt a severe blow to American online betting development.

The Australian online gambling industry, on the other hand, is taking a more constructive approach, and regulators are said to be on the verge of delivering legislation which would ensure that sufficient background investigation of operators takes place, that financial solvency of the companies involved is guaranteed, and that taxes are paid to the relevant governmental authorities. However, the UK, as previously stated, already has a secure regulatory framework in place, so punitive taxation is really all that is driving punters and operators away, an issue which Mr Brown has made a step towards addressing today.

Failure to implement reforms soon would almost certainly have brought the industry to its knees in the long term, as the resultant growth in internet and offshore betting, and the onshore sector's inability to compete, would have led to a significant reduction in UK turnover. This in turn would have led to a reduction in government revenues and would have adversely impacted on employment within the industry. The increase in spread betting was (and still is, to a certain extent) also an area of concern for the UK betting industry, as the vast majority of bookmakers specialising in this form of gambling promise to absorb the cost of betting duty and any other levies due into their spread prices. This, combined with the absence of capital gains tax on any profits, posed a powerful and additional threat to the traditional betting industry.

In the run-up to the budget, experts warned that inaction on the issue of betting duty could also lead to a rise in the level of illegal gambling, a practise which the Bookmakers' Committee of the Horserace Betting Levy Board (catchy name, no?) estimates already costs the Treasury £1 billion per year in lost revenue.

In the final analysis, though, it seemed unlikely that the government would want to risk losing out on its chance to take a tax slice of the global cyberspace market, so it was really no surprise that betting duty reforms featured strongly in the Chancellor's latest budget.

Reforming on a sufficient scale to make a difference will not be that easy, however, and there are doubts as to whether the chancellor's recent announcement will be enough to lure all of the major bookmakers back to Britain. The difference between the UK's current taxation regime and that of an offshore jurisdiction is not just the betting duty, but also corporation tax and a raft of other taxes that impinge on business. Corporation tax on its own, currently set at 30% on net profits, equates to a 4.5% tax on turnover if pre-tax profits are at 15% - and the chancellor can do very little to give exemptions from it, since that would be counter to EU rules. 

A 15% tax on gross profit is reckoned to translate to 3% on turnover, so taken together with the 4.5% stemming from corporation tax, that makes up a 7.5% overall tax on bookmakers' turnover - still uncompetitive when compared with jurisdictions such as Ireland and Gibraltar.

Victor Chandler, the trailblazer of offshore online betting, believes that were online brokers to repatriate to the UK punters would still suffer, as such costs would be passed on to them.

Before the budget, William Hill and Ladbrokes (both with UK listings, so firmly caught in the corporation tax net) indicated that they would consider relocating back to the UK if the chancellor made changes, but other offshore bookies are not so sure. Many have spent a great deal on establishing, staffing, and maintaining their offshore operations, and said that the chancellor's offering would have to be fairly substantial to tempt them back. Although the predicted turnover increase of up to 50% will undoubtedly be a draw for those with betting shops in the UK, and may in their minds offset the still high taxes on profits, bookmakers with no UK operations any more, such as Victor Chandler and Simon Bold say that they have no plans to leave Gibraltar.

It is also an unusual idea, to put it mildly, that a Treasury department should create a 'gilded cage' in order to retain a business sector. Usually, tax incentives are supposed to work all on their own. Would it be sensible for a firm to mortgage its future by agreeing not to open foreign offices, in return for tax benefits which can be taken away again next year by a new, anti-betting Chancellor? What kind of contract will the Government have to sign to counter such fears? Will shareholders in such firms think that it is a good idea to hobble their companies in such a fashion, or will they vote with their feet and walk away?

Another, more general complication likely to arise now Mr Brown has decided that he is minded to replace betting duty with a gross profits tax, is over the definition of gross profits. The Customs and Excise consultation document relating to alternative duty structures released last year defines gross profit as 'gross turnover less customers winnings' and adds that 'in line with the principle of a gross profit duty structure, no direct allowance would be made for day to day business costs'. In other industries, gross profit is usually defined as turnover less direct costs, which goes a lot further than 'winnings'.

As UK-based and returning bookmakers are to be taxed twice (once on their gross profits, and then again on their net profits in line with UK corporation tax rules), it seems likely that they will want to negotiate the most favourable definition of gross profit that they can. The ensuing tussle may prove quite entertaining…


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