On how the UK government dealt with the matter of taxing betting exchanges.
When the UK Government introduced a gross profits tax (GPT) system for the betting industry in 2001, it was hailed as being;
A radical reform of betting duty, which will create the right competitive environment for British-based bookmakers to develop their business domestically and internationally, and give punters a better deal.
The tax, primarily introduced to encourage the "Big Three" boomakers to move their telephone and internet betting operations back onshore, worked on the basis that where competition intensified and gross profits fall, tax burdens would be reduced.
The Big Three warmly embraced the tax, not least because it reduced the price of a bet to the punter, and led to an immediate increase in the number of bets being placed in their shops, through recycling. John Brown, the then Chairman of William Hill, speaking at the British Horseracing Board AGM in June 2002, said that the new Gross Profits Tax was:
..truly momentous. The significance of this cannot be over estimated. This new tax changes everything the basis is now fairer, it is set at a sensible rate, and thus enables the bookmaker to stand the tax without deductions from the punter. It represents forward thinking of the best possible sort, and for all that all of us should be very grateful. In my opinion, GPT will prove to be the single most important and influential development in betting and racing in 30 years. At a stroke it has removed the benefit of betting offshore, or betting illegally. Already more and more overseas business is finding its way to the UK.
Betting Exchanges arrive
In the wake of the arrival of the GPT, betting exchanges began to gain a foothold in the UK betting market. Betting exchanges were effectively trading systems that facilitated person to person betting, allowing traders to either play or lay on a wide range of sporting markets, and ensuring that the companies that ran them, such as Betfair, did not have to manage risk. As is so often the case when a disruptivetechnology arrives on the scence, many questions were asked as to the status of the betting exchanges, from both a fiscal and regulatory perspective.
Under the 42nd Levy Scheme it was announced that the levy payable by Betting Exchanges on British horserace betting business would be charged at 10% of the gross profit achieved by individual successful layers.
In April 2003, the Treasury announced that betting exchanges, which had previously been taxed on the net aggregated profits of the layers on the exchanges, would now pay a 15% gross profits tax on the basis of their commission;
General betting duty shall be charged on the amounts ("commission charges") that the parties to the bet are charged, whether by deduction from winnings or otherwise, for using those facilities...No deductions shall be allowed from commission charges.......The amount of duty charged under this section in respect of bets determined in an accounting period shall be 15 per cent of the commission charges relating to those bets.
Traditional bookmakers and the British Horse Racing Board (BHB) openly criticised the taxing formula that was being applied to the betting exchanges. The bookmakers claimed that individual layers on the exchanges, because they were effectively acting as bookmakers, should be made to the pay the GPT;
All that we are asking for is that anyone who lays bets on an exchange should be subjected to the same regulation and taxation issue as any other licensed bookmaker.........We would welcome any step forward that is made to address the imbalance that has been allowed to arise in what is traditionally the best-regulated gambling industry in the world.
The BHB claimed that the growth of betting exchanges, fuelled by a lenient tax system, had served to put the future of the entire horse racing industry in jeopardy;
their impact on racing's finances has been ignored by the Levy Board, and the charging mechanism by which revenues are raised by both the Levy Board and Government is fickle to say the least.
In March 2004, the Chancellor of the Exchequer Gordon Brown referred in his budget speech to a review of the tax treatment of betting exchanges and their clients.. This represented the first serious sign that individuals on the betting exchanges may indeed be taxed over and above the commission which they already paid to the betting exchanges, as a percentage of their winnings.
The Joint Committee on the Draft Gambling Bill, who reported back to the Government in April 2004, also proposed that a new fiscal and regulatory regime should be applied to betting exchanges;
We believe that the best way of achieving a balance between these points is to ensure that those using the exchanges to lay bets professionally are identified, regulated, made subject to the appropriate levy arrangements, and have their status checked.
The Joint Committe stated that persons using the exchanges to lay professionally (non-recreational users), should be identified and dealt with appropriately;
non-recreational users should be identified through their betting patterns, with due regard given to the amount laid as well as the frequency of laying;
they should be registered with the Gambling Commission and any registered layer that is found cheating, or in breach of sporting codes, should have their registration cancelled and be prohibited from using a UK-based betting exchange for a set period of time;
betting exchange operators should be made responsible, as part of their license conditions for the operation of a system of registration of Non-Recreational Layers and the transmission of information to the Gambling Commission about such users;
non-recreational layers should be required to pay levies to particular sports over and above the commission they pay to the exchange.
On June 14, the UK Government made its response to the First Report of the Joint Committee on the Draft Gambling Bill; Session 2003-2004. On the subject of betting exchanges, they rejected the proposals put forward by the Joint Committee on the Draft Gambling Bill that layers on the betting exchanges should be required to register for integrity purposes, levy payments and, perhaps, additional taxation. However, the Government did say that those that use the exchanges to conduct betting operations in the course of business would be required to obtain an operating licence;
We do not propose to adopt the Committee's proposal that non-recreational users of exchanges should be registered with the Gambling Commission. People who are betting in the course of a business require an operating licence from the Commission for their activities. As explained above, we do not believe there is then a further category of user who can be identified clearly who needs separate regulation.
The UK's Gambling Bill, which ushered in a process of industry deregulation, was printed on 18th October 2004; and the proposals contained no mention of the further regulation of individual clients of betting exchanges, or any attempt to tax non-recreational layers.
However, in November 2007 British Horseracing Authority (BHA) put forward a case to the Department of Culture, Media and Sport for a greater contribution from the betting industry in the 47th levy.
Seeking a levy of somwhere between 135million and 153million for 2008-09, compared with an estimated 94m from the latest scheme, the BHA's document called for the government to settle the levy on the basis of 15% of gross win on British horseracing.
The BHA also called for betting exchanges to contribute to the levy on a new and equitable basis, stating that the contribution made by betting exchanges to the Levy should increase from the 6m paid in 2006-07 to 20m. This figure would be achieved, they argued, through the imposition of a 1.25% Levy on the net profits of punters on betting exchanges, raising the possibility that Betfair and the other betting exchanges would be forced to increase their commission charges.
In July 2010 the latest broadside in the debate was was fired, when the The Horserace Betting Levy Board announced that it had begun an extensive consultation process on various questions relating to the issue of whether certain users of betting exchanges should be regarded as being leviable bookmakers for the purpose of the Levy.
At the centre of the consultation document lay the notion that betting exchanges were not in existence or even envisaged when the main legislation concerning the Levy (in particular the Betting, Gaming and Lotteries Act 1963) was passed, and that no amendments had therefore been made to this legislation to take account of said betting exchanges;
To date, HBLB, and the betting and racing industries, have worked on the basis that betting exchanges themselves fall within the definition of "bookmaker" under section 55 of the 1963 Act, and so are liable to pay the Levy. Levy is calculated as a percentage of the betting exchange's gross profits (i.e. the profits earned by the commissions charged to users of betting exchanges). Further, no users of betting exchanges have paid the Levy, except for licensed bookmakers in respect of their use of betting exchanges in the course of their bookmaking business (essentially to hedge their risk).
The Funding Question
The funding question, which lay at the heart of the debate that raged between the disruptive betting exchanges and the BHB, the Governing Authority for British horse racing, was both complex and controversial.
The BHB contended that the betting exchanges enjoyed an unfair tax advantage compared with traditional bookmakers, and, that they single handidly depressed the margins of the on-course and off-course betting business';
the taxation of betting exchanges creates an unlevel playing field which ... (gives) betting exchanges an unfair advantage and results in less money flowing to government and racing.
Establishing a clear relationship between the betting exchanges and a fall in bookmakers margins, was not easy, however. In the first instance, there was the fact that the internet had ushered in increased competition; with the likes of BlueSq, Paddy Power, Canbet, Gamebookers and Bet365 now competing for market share.
Secondly, there was the arrival on the scene of the many odds-checking websites, which served to put pressure on industry margins, through making prices more visible and also encouraging a greater degree of competition. And finally, there was the fact that turnover figures across the industry, supported the notion that a high proportion of the turnover going through Betfair was actually incremental, rather than being purely cannibalistic.
From Betfair's perspective, the shortfall in boomakers margins could be attributed to a radical change in punter behaviour towards backing short price favourites, and, also to the introduction by the bookmakers of low margin fixed odds betting terminals.
The profit margin built into starting prices had indeed fallen from 2.07 per cent per runner in September 2000 to 1.45 per cent per runner in September 2006.
However, on 1 November 2006 a new procedure for returning Starting Prices (SPs) was introduced, following a review of the system by the Starting Price Regulatory Commission under the chairmanship of Lord Donoughue.
Whereas previously Starting Prices had been determined by taking a sample of bookmakers' prices, and taking the lowest price among the best third available to good money at the off; under the new system the SP is the lowest price among the top 50 per cent, including at quieter meetings, bookmakers betting each-way. There is also greater input from the on-course representatives of major off-course betting shop chains.
The first month-to-month comparison of SPs returned under both the old and new procedures revealed a rise in the profit margin of bookmakers from 1.59% per runner to 1.8%. Figures later revealed that the margin was trending back towards 2% per runner.
To tax or not to tax?
Regulation is a contentious issue, not least, because an inevitable tension exists between developing a regulatory framework for what is an innovative technology, whilst at the same time encouraging its development.
Whilst the traditional bookmakers and the BHA, perhaps, not unsurprisingly, felt that there was a clear cut case for taxing professional layers on the betting exchanges, the government had to consider competition issues, alongside the implications of taxing the new trading systems, for innovation and productivity within the industry.
The issues surrounding funding were in themselves not so clear cut, as to provide the Government with a clear cut reason to tax the betting exchanges. The factors that impacted upon the government's review process of the Levy were, according to a source; the general changes in the competitive milieu, such as the arrival of betting exchange centres on the High Street; the migration of former on-course bookmakers onto the betting exchanges; the useage of the exchanges by non-domiciled bookmakers; the useage of the betting exchanges by high net worth individuals, turning over millions of pounds a year; the fact that Betfair enjoyed a significant monopoly position in the sector, and that any tax geared towards it and its users, may well serve to stifle competition (as well as placing small UK based betting exchanges at a disdavantage compared with exchanges based offshore.).
The point was not lost, that it would be somewhat ironic, were the GPT, which had been designed to boost industry competitiveness, were to be used in such a manner as to drive the betting exchanges offshore, or to blunt their competitive edge. So the question that the government faced was to what extent it would be worth introducing a new tax scheme, which would serve to eliminate or reduce the benefits of the betting exchange system for only a small number of individuals - weighed against the longer term benefits to the UK economy as a whole of the betting exchange sector and the clear contribution that they made towards maintaining the competitive edge of the UK as a global betting centre.
They had to decide whether the registration and taxing of the one per cent of individuals that allegedly made significant profits by laying on the betting exchanges, would represent a fiscal and regulatory burden too far.
In November 2004, Mr David Michels of Ladbrokes betting company said that his company eagerly awaited the results of a Treasury review of the online betting exchanges;
We believe the chancellor will level some form of additional taxation on betting exchanges." A previous Treasury examination of exchanges found no need to impose a further tax.
His comments came a day after Sporting Options, allegedly one of the largest companies in the betting exchange sector went bust. This event seemed to suggest that any additional taxation of the betting exchange sector, would lead to other betting exchange companies going the same way, and would serve to stifle the development of the fledgling industry.
Speaking at a SIS-sponsored seminar organised by Global Betting And Gaming Consultants in London, David Harding, of the bookmkakers William Hill again called for the strict regulation and taxation of betting exchange clients;
The UK is now the only nation in the world that is not seeking to ban these things. We don't want to see them banned, but we want a level playing field. If people are on there to conduct a business, they should be subject to the same licensing system that we are, and if they are layers, they should be subject to the same tax.
Antonia Sharpe, a spokesperson for Betfair said in response to Harding;
The exchange model is completely different from the bookmaking model.....Bookmakers work to a margin between 10% and 17%, whereas we have a margin of 3% to 5%. The reason they have such a huge margin is that they have to manage their risk. Betfair doesn't, because we only accept bets that are instantly matched on the exchange by another punter........Amending the Gambling Bill as the traditional bookmakers wish will actively work against the aims of the Bill, by encouraging people to seek out alternative platforms on which to bet, outside the regulatory framework. This will fundamentally undermine the legislation, and kill the award-winning exchange model in the UK.
The following day, the government's spending watchdog, the National Audit Office said that Customs had underestimated (and failed to understand) the popularity of new forms of gambling, such as internet betting exchanges, adding that these new services posed new risks to [tax] revenue.*
In October 2005, the Lotteries and Gaming Authority of Malta announced that Betfair was set to launch an operation in Malta on Thursday 13 October. Few failed to see this announcement for what it really was; a veiled threat from Betfair, that should the Treasury annouce in the chancellor's pre-Budget report in November that it was going to levy some form of additional taxation on betting exchanges, that it would simply not have any servers in the UK.
In December 2005, the Chancellor, Gordon Brown delivered his Pre-Budget Report Speech to the House of Commons. On the question of gambling, it was stated that current taxation regimes were working well and would stay in place.
In response to the Levy Board July 2010 announcement of a consultation on betting exchange customers, Betfair's Legal Director, Martin Cruddace, said;
We.re very surprised by the Levy Board.s announcement. This issue of whether betting exchange customers are acting as bookmakers has been the subject of debate since Betfair started. After a thorough, independent review of this very issue throughout 2004 and 2005, which took into account full representation from all stakeholders and other Government departments, the Treasury came to the conclusion that the treatment of betting exchanges and their customers was fair. Since then, there has not been one scrap of evidence produced by anyone to suggest the situation has changed.
We are extremely interested to see if the Levy Board is able to run a fair and impartial consultation process bearing in mind that several of their directors have publicly stated positions that would seem to prejudge any outcome. We are also surprised that any consultation that singles out the customers of one class of operator could be considered fair or lawful where no such distinction is made in any part of the relevant legislation.
Today's announcement by the Levy Board, together with the statement from Nic Coward of the BHA, illustrates exactly why we have redirected our voluntary levy payment. We have not withdrawn this money from British Racing; we have withdrawn our donation to the Levy Board and BHA. We want to make sure that it is spent to deliver real benefits to the sport rather than being diluted by middlemen and the accompanying costs that cover their salaries, pensions contributions and the substantial legal bills incurred in a sustained and discriminatory attack on our business. We will be announcing some of the first investments we are making shortly.
In its consultation paper published in July 2010 the Horse Racing Levy Board pinpointed the fultility of its own project, before it had even properly begun;
First, there is a difficulty with a necessary premise: that there are customers of a betting exchange who are carrying on a business (section 27(2)(a)). That is ultimately a question of fact which would need to be demonstrated and in truth cannot be. Leaving aside that fatal initial objection, the following further points arise....
On 20 July 2012, a Judicial Review ruled in favour of Betfair, in the case of the William Hill Organization Limited versus The Horserace Betting Levy Board. The Court ruled for Betfair as supported by the Levy Board, and confirmed the outcome of the board's own extensive consultation, undertaken in 2010-2011, that had found that customers of betting exchanges were not liable to pay the Horserace betting Levy.
Martin Cruddace, Chief Legal and Regulatory Officer at Betfair at the time, said:
We welcome the High Court ruling which has vindicated the position of Betfair. It is now neither sustainable nor rational to argue that Betfair customers should be liable to pay the Levy any more than should customers of any other betting operator. It is ironic that William Hill's online business pays not a penny in Levy itself, despite making tens of millions of pounds in profits annually from British Racing. Yet still, it chose to argue that an undefined class of exchange customers should be required to pay Levy. The savings made by William Hill through Levy avoidance may help fund poorly advised legal challenges such as this one, but I would suggest that their resources would be better spent working with British Racing to reach a commercial agreement in a similar vein to the one Betfair recently signed with the sport.