A new tax regime for online gambling could help some bookmakers but harm others.
Thanks to the launch of the National Lottery in November 1994, gambling has become an increasingly popular activity in the UK.
Indeed, according to the British Gambling Prevalence Survey 2010, almost three-quarters of over-16s in the UK participated in some form of gambling during the previous year. This means that almost 36 million adults had some kind of flutter that year.
Big business
Buying Lotto tickets and scratchcards were the most popular gambles. Alas, operator Camelot generated sales of £5.8 billion in the year to 31 March 2011, but paid out less than half this amount in prizes.
Other popular forms of gambling include horse racing, slot machines, sports betting, bingo, poker and casino games, as well as the once-mighty football pools. Thus, gambling is big business, with total UK stakes estimated at £100 billion a year.
A taxing problem
One concern for HM Treasury is that many UK bookmakers and gaming companies have moved their online operations to low-tax regimes overseas. After all, why pay of 15% of gross profits, plus corporation tax, in the UK, when you can pay no UK taxes and low or no local taxes by moving abroad?
As always, the thorny problem is whether to tax services at the point of consumption or at the point of supply. Overseas operators taking bets from UK consumers would argue that they should not be liable to UK taxes. Similarly, UK-based bookmakers feel they are disadvantaged by the UK's higher taxes on onshore operators.
One solution to this problem is for countries to make it illegal for offshore and online bookmakers to take bets from their citizens via the Internet. This then allows nations to sell online-gaming licences to non-domiciled operators, raising revenues for state treasuries while legalising online betting. This model has successfully operated for several years in some European nations, notably Italy.
Changing the rules
Last week, the Minister for Tourism and Heritage, John Penrose, announced that online betting firms taking wagers from British punters would need to buy a Gambling Commission licence. In time, this would likely evolve into a fully fledged tax grab aimed at remote gambling.
On Monday, Justine Greening, the Economic Secretary to the Treasury, echoed these views in a statement to the House of Commons. She stated that the government intended to require all betting firms dealing with British punters to hold a UK licence.
Also, rather than painting this as yet another tax grab, the government aims to sell this licensing scheme as a method of improving consumer protection for online gamblers.
Of course, this won't happen overnight, but after a consultation process with gambling firms, the racing industry, and other interested parties. Any licensing or tax changes would most likely be proposed before the Budget next March, perhaps to take effect in 2013.
Help or hindrance?
One fly in the ointment is the risk that some overseas operators may continue to take bets from British punters while refusing to buy UK licences or pay taxes. This happened in the US after the Unlawful Internet Gambling Enforcement Act was introduced in October 2006. However, the FBI eventually got their men, shutting down three leading poker sites on what was called Black Friday.
Clearly, a drop in the gross-profits tax from its current rate of 15% would help British bookies to be more competitive on a European scale.
Indeed, were this rate to be slashed to, say, 5%, then it could see UK bookmakers -- such as FTSE 250 firms Ladbrokes (LSE: LAD) and William Hill (LSE: WMH) -- repatriating their online-betting arms to these shores. Both businesses moved their Internet arms to Gibraltar in 2009, to take advantage of its 1% tax on gambling profits.
Despite the potential for lower taxes, higher profits and increased market shares, this news caused the shares of the UK's major bookmakers to slide. On Monday, Ladbrokes fell 2.8% to 139.2p, William Hill dipped 1% to 217.6p and Betfair (LSE: BET) tumbled 5.6% to 615.5p. However, all three shares rebounded slightly yesterday.
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