Treasury should consult industry over tax rate, says Committee

An influential government select committee has welcomed the move to regulate egaming on a point of consumption basis but recommended the Treasury further consults the industry to establish the “correct level of taxation”, taking into account the need to encourage companies to “accept” UK regulation and taxation and to “discourage the formation of a grey market”.

In a report published this morning, that focuses largely on the land-based and retail gambling sectors as well as the role of the Gambling Commission, the Commons Culture, Media and Sport Committee said the Gambling Act 2005 had resulted in “numerous inconsistencies” and is not sufficiently evidence based.

The Committee also slammed the Gambling Commission calling it an “overly expensive, bureaucratic regulator” and suggesting it had “not gone far enough”, in particular, in its efforts to reduce its operating costs, adding that it would also call for an immediate independent review of its expenditure “after a new system for remote licensing is in place, with a view to reducing costs and the regulatory and fees burden imposed on the industry”.

It adds that more power should be devolved to local authorities ““ which have the local knowledge to assess their impact ““ with central regulation existing to “ensure high standards of protection for the vulnerable, particularly children”.

The most significant section of the report for online operators highlighted by the committee was, in its own words, “The failure of the Department for Culture, Media and Sport to work with the Treasury and set remote gambling taxation at a level at which online operators could remain within the UK and regulated by the Gambling Commission has led to almost every online gambling operator moving offshore whilst most are still able to advertise and operate into the UK.

“The Committee welcomes the move to regulation of the on-line industry on a point of consumption basis but says the Treasury still needs to work with industry stakeholders to establish the correct level for online gambling taxation, taking into account the need to encourage companies to accept UK regulation and taxation and to discourage the formation of a grey market.

The Hi-Growth eGaming Companies Forum , a group set up in May this year to engage with government to discuss the implications of imposing a flat rate 15% gross profits tax on small, innovative online gaming companies welcomed the committee’s findings and recommendations.

Charles Cohen, CEO of mobile operator and games supplier Probability and chairman of the forum, said it was good to see politicians “recognising that the imposition of a high rate of tax on the online industry could have negative consequences for UK consumers”.

“It would see legitimate, regulated operators forced to exit the UK market. It is inevitable that the gap they leave will soon be filled by black market operators who have no intention of obtaining a licence, paying tax, or treating their customers fairly.

“Smaller companies and technology developers who are the real drivers in this industry are particularly at risk; bigger operators can subsidise lower margin e-gaming with profits from other areas of their businesses. Smaller businesses have nowhere to hide. A lot will just go out of business or take their chances in the black market either as operators or suppliers,” he added.

The Forum has made a number of submissions to the Treasury that it needs to consider alternatives to “applying a flat-rate, high level of duty across the whole industry”, Cohen added in a statement.

“No legitimate operator should be taxed out of the market. We’re not asking for no tax at all. We’re just asking government to consider that when it comes to gambling, you have to consider tax and regulation as two sides of the same coin. As the Committee’s comments suggest, the right solution has to be one that doesn’t see tax work to the detriment of the creation of a strong regulatory regime that ultimately protects UK consumers.”

The deadline for submissions to the UK Treasury’s consultation on the policy design of proposals to implement new regulatory and taxation measures on the UK online gambling industry closed at the end of June.

The Gibraltar Betting and Gaming Association (GBGA) has gone a step further than the newly-formed Forum and spent more than half a million pounds hiring legal advice to fight the UK government’s plans to impose a 15% point of consumption tax on operators at the end of 2014. The group has gathered together 23 of Gibraltar’s largest licensees and, according to a source, submitted an extensive document questioning the government’s motives in imposing a point of consumption tax, the legal grounds on which this is based and the limits to which they are prepared to go to accept the revised levy.

John Penrose, the British government Minister responsible for gambling policy and regulation, announced in July last year that all on and offshore operators selling services into the UK would in future have to obtain a licence from the Gambling Commission if they wish to continue offering online gaming to UK customers.

The UK Offshore Gambling Bill calling for a point of consumption tax to be imposed on British-facing egaming operators will receive a second hearing on January 25 next year. Originally introduced by conservative Suffolk MP Matthew Hancock on 8 February 2011, Hancock’s bill was principally brought on the premise that offshore operators are supposedly depriving horse racing authorities of funding and seeks to reform the UK Gambling Act 2005 and ensure operators contribute to horse racing but through other means than the existing levy.

On his personal website he says the “loophole means that 18 of the 20 largest bookmakers currently avoid paying £300m of UK taxes and tens of millions in Horseracing Levy contributions”.