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An Open Letter to the Coalition Government - November 2010

DEAR SECRETARY OF STATE...

In the light of the Coalition Government’s near silence on gambling, Steve Donoughue and Fabian Adams-Sandiford suggest a few areas of reform to Ministers.

The Coalition Government has now been in office for more than 6 months, but it still is not clear what its policies on gambling are or indeed if it has any. A review of the more than 100 press releases issued by DCMS since May reveal only two gambling-related announcements (the sale of the Tote, and the establishment of a review on using funds in dormant betting accounts to fund sport) and arguably one of those is old news and while the other is unworkable. The Government has found the time to espouse a vision for local media, to make a commitment to a new tourism strategy, and to unveil new plans for the 2012 Olympics, superfast broadband and competitive school sport. And yet, of an industry that employs more than 120,000 people and turns over more than £84 billion each year it has said nary a word.

If this silence is a sign that Government intends to take a ‘hands off’ approach to the industry then this is to be welcomed. However, we believe that there are a number of anomalies that should be removed before the gambling is left entirely to the Gambling Commission.

Abolish the Levy

The Levy was established in 1961 to compensate racing for the anticipated loss of gate receipts when off-course betting was legalised. Given that this was and is its purpose, the Levy is both an anachronism and an anomaly. An anachronism because the sale of live picture rights to bookmakers now provides a clear and direct means for compensating racing for ‘off-course’ viewing. It is also an anachronism because the Levy has been unable to respond to developments in the gambling industry (for example, betting exchanges, and the relocation of bookmakers offshore). And it is an anomaly because it perpetuates a situation in which racing is the sole sport funded by its own statutory tax.

The Levy’s credibility is further undermined by the fact that neither bookmakers, nor the horseracing industry nor the Government are happy with the mechanisms currently in place. The previous Government even passed a law to abolish it in 2004 (Horserace Betting and Olympic Lottery Act) but civil servants have yet to find a funding alternative that satisfies both racing and the bookmakers. The two side’s detailed arguments have been rehearsed ad nauseam elsewhere. Suffice to say that they boil down to the British Horseracing Association’s (BHA) belief that the bookmakers are failing to abide by the spirit of the Levy legislation, and the Association of British Bookmakers’ (ABB)contention that racing is unwilling to abide by itsletter. As result the process for agreeing the Levy scheme regularly collapses amid acrimony and rancour. Indeed, at the time of writing the representatives of the bookmakers and those of the horseracing industry have once again failed to agree the next Levy payments. It looks likely that the Government will have to step and make a formal determination.

Refereeing between these two industries cannot be the proper business of Government. The Government is finally about to do something, but rather than come up with an alternative for the Levy it is just preparing to exit from its role ‘arbiter of last resort’. A re-jigged Levy Board will probably step in as the funding of racing’s Supreme Court. This does remove the hot potato from government’s lap but it does not solve the problem of a dysfunctional funding mechanism and this is remiss.

One option would be to put racing on the same footing as other sports. The BHA is deemed to be the governing body of horseracing and recognised as a sport, so it could be funded directly by, say, Sport England. Capital improvements to racecourse could be eligible for funding from the National Lottery. Like other sports, racing would generate prize money from sponsors and from the sale of television and live viewing rights.

A more radical alternative would be to un-tether racing from the State entirely and allow it to ‘float free’ as a commercially-funded entity. One key benefit of this approach would be that it would force racing to confront its most significant problem: excess supply of racecourses, fixtures, races and horses. Racing would have to allocate its resources much more efficiently or go out of business. However, as quid pro quo for being floated off, racing could be given the opportunity to generate revenues from another source. In the Gambling Act 2005 is the ability (with the help of a change in regulations by the Secretary of State) for racecourses to operate casinos on racedays. The business logic being that racecourses attract a lot of gamblers who may wish to continue gambling after the programme of racing has finished. The concept is known as Racinos, and operates successfully throughout North America. This could bring a significant increase in revenues to the courses, and greater financial stability to racing.

What is clear that doing nothing is unlikely to be a viable option in the long term. A racing industry wedded to subsidy will only continue to demand more of what they think is rightfully theirs in order to support the otherwise unsustainable businesses. The BHA has already argued that all the betting offered in betting shops should be levy-able because the only reason people go into them is for the racing. A quick trip to any bookmakers disproves this immediately. Racing needs to realise that unlike fifty years ago, today’s gamblers are more sophisticated and have access to a far wider range of gambling products. If the time and effort put in to fighting the bookmakers was put in to improving the product than arguably the option of a commercial alternative would not appear so daunting to racing. The Government can play an important role in facilitating this by ending the Levy.

Reform the process for licensing casinos

The current arrangements for issuing casino premises licences are also an anomaly. The creation of the Casino Advisory Panel in 2005 means that casinos are the only gambling premises that are subject to national rather than local decisions about their number and location. That this is stifling an industry that would otherwise be providing much-needed private sector jobs is amply demonstrated by the fact that none of 16 new casinos authorised by the previous Government has been developed yet. And this is three years after the Act came into force! Put simply, the decision to invite local authorities to bid for the right to host the new casinos has resulted in premises licences being awarded to places where operators do not want to open casinos. Arguably, Milton Keynes and Newham are the most attractive of the 16 new casino licences. Others locations, such as Dumfries & Galloway (with a population half that of Newham), are unlikely ever to attract the interest of a casino operator. The two-year period during which the Casino Advisory Panel followed the misguided policy of limiting supply rather than responding to demand represents a missed opportunity to allow the industry to expand.

That is not to say, however, that there should be an entirely free market in casinos. There is a real danger that in times of hardship – such as the one we are currently enduring – local authorities will see casinos as a panacea and take licensing decisions solely based on economic considerations. It would be highly undesirable for large numbers of casinos to be licensed suddenly in the hope that they will bring jobs and prosperity. Oversupply in the casino market is a direct route to crime and problem gambling. The reason being that if casinos have to fight for customers they have an incentive to cut corners to save costs. In other parts of the world this has resulted in casinos not operating within the law.

The Government should, however, liberalise the casino licensing process. First, it should amend section 175 of the Gambling Act to permit more than one Regional casino. Second, it should instruct the Gambling Commission to work with local authorities to develop an effective model for clusters of casinos that offer critical mass and that can act as gambling-based destination resorts. One model for these developments might be for individual local authorities to own the land that the new resorts are built on so that they can charge operators a turnover-based rent. This would ensure that local authorities as well as the Treasury obtain a direct financial benefit from gambling. Finally, it should identify a limited number of areas around the country that could host and would benefit most from the new resorts (for example, the South-West, the North West, Northern Ireland).

A handful of these resources located in rural areas around the country would quickly become holiday destinations for both the domestic and international markets. They would provide thousands of jobs while they were being built and once they were open (the Hyatt Regency Hotel/Casino in Thessaloniki, for example, employs 4,500 people). They would also benefit from significant improvements in local infrastructure because operators would invest in order to ensure that staff and customers were able to reach the resorts easily. Problem gambling would be mitigated by not having the casinos on people’s doorsteps (which is the problem with urban locations) and with the use of technology to track peoples gambling spend in the resorts, interventions could take place if they exhibited behaviours associated with problem gambling.

Amend the tax system to encourage off-shore operators to return to the UK

One of the rationales behind the Gambling Act 2005 was to provide the conditions for the UK to become the centre of the global online gambling industry. The framers of the Act recognised the many benefits of the UK occupying this position: high-quality, high-tech jobs; inward investment; substantial tax revenue, and; the ability to implemented balanced regulations that would prevent crime and problem gambling. In other words, a classic ‘win-win’ situation.

Inevitably, the Treasury took a different view and set the tax rate on online gambling at 15%. While this is on a par with taxes on other forms of land-based gambling, it is significantly greater than the 0%-4% rates paid in jurisdictions such as Malta, Gibraltar, the Isle of Man and Alderney. And this does not take into account the fact that operators in these locations are not required to pay VAT, Corporation Tax, PAYE and National Insurance Contributions either. The result has been that only a handful of operators have located here, depriving the UK of the opportunity to be an important player in one of the internet’s fastest growing industries, estimated to be worth nearly US$350 billion. This would merely be tragic were it not for the attendant element of farce.

Because the UK is one of the biggest markets for online gambling in the world (worth an estimated £10 billion annually) we have become a net exporter of millions of pound to the treasuries of more lightly taxed jurisdictions.

Our current straightened circumstances, which we are told can only be alleviated by substantial growth in the private sector, provide an ideal opportunity to revisit the taxation of online gambling. HM Treasury is not known for its willingness to reduce taxes, but there is a precedent when it comes to taxes on gambling: the reduction in Gross Profits Tax on bingo from 22% to 20% last December. However, it would require a much larger tax cut to tempt the online gambling industry back from sunnier climes. That is not to say that the Government would need to institute a zero tax regime. Despite the UK’s many attractions in terms of location, recruitment and communications and transport infrastructure, the other business taxes offset the financial advantages of even a zero rate tax on online gambling.

There is an alternative though, and that is to tax the offshore operators who sell their gambling products into this country. This could be done by licensing all those who wish to advertise online gambling here and charging a fee for those licenses. Advertising is critical to any operators’ success so this tax would capture every operator who targets the UK market, which is most of them. Add to this a requirement on licence holders to be ‘fit and proper persons’ and to have in place effective problem gambling programmes and one has policy that not only generates a large amount of revenue but protects UK citizens as well. Of course, this approach does not directly increase employment. However, if the Government also exempted operators who were located in the UK on the grounds that they already complied with all the advertising and problem gambling rules by having a UK gambling licence, it could well offer sufficient savings (cost of operating in the UK versus cost of operating offshore plus UK advertising licence) to convince operators to relocate here and employ local people. A consultation on the Regulatory Future of Remote Gambling in Great Britain closed in June. The announcement of outcome of that consultation presents a prime opportunity announce changes in the taxation of online gambling.

As Civil Servants were once wont to say, “The Minister may wish to consider these recommendations.”

© Steve Donoughue, Fabian Adams-Sandiford - 2010

References

  1. Online Betting - Gambling Consultant - An open letter to the coalition government - An Open Letter to the Coalition Government - November 2010
  2. casino games - Gambling Consultant - An open letter to the coalition government - An Open Letter to the Coalition Government - November 2010