UK Government Intends to License (and Tax?) Offshore Operators

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

In July, the minister responsible for gambling, John Penrose MP, announced (see here) his intention to require that operators based outside Great Britain, but selling into the British market, hold a licence from the Gambling Commission. This was followed a few days later by an announcement from the Economic Secretary to the Treasury, Justine Greening MP, that the Government would, at the same time, also look at the tax treatment of offshore operators.

Please see here for a comment piece written by David Zeffman and published in Betview.

As the next step in the process, on 12 September HM Treasury commenced an informal consultation on the introduction of a place of consumption gambling tax which would entail taxing operations on the basis of Customer location.

This idea is not a new one. A place of consumption tax was considered in the Government study that preceded the 2001 Finance Act and the change from a turnover tax on stakes to a "gross profits tax" for operators. The concerns over enforcement were a central reason for the introduction of such a tax being rejected. The following conclusions were drawn in that study:

“Views on the Place of Consumption Tax (POC) proposal.

While a number of the respondents recognised the merits of this proposal all agreed that it would be open to abuse with Customs unable to exercise any control over non-compliant overseas bookmakers. Given the pace of development of communications technology this option was felt to be impractical and inappropriate.”

The corollary of the difficulties in enforcement is, of course, that it would give non-compliant operators an unfair financial advantage and allow them to offer more attractive products. Whilst these concerns over enforcement have not changed, the international remote gambling tax landscape has.

A number of jurisdictions have now introduced regimes which, amongst other objectives, aim to ensure that gambling taxes are paid in respect of bets placed by punters located within that jurisdiction. Although the operator may be based outside the jurisdiction, the principal "stick" that is used to enforce the payment of the tax is the revocation of licences for those that don't pay.

Furthermore, place of consumption taxes outside of the gambling sector are becoming more popular. For example, the VAT treatment of "electronically supplied services" supplied to consumers by non-EU operators (e.g. downloading music files) has, for some time, been operated on a place of consumption basis. Due to the perceived success of this way of levying VAT, new rules are soon to be introduced whereby this place of consumption basis will become far more prevalent throughout the EU's VAT system.

Whilst the same problems regarding enforcement were raised when these place of consumption VAT rules were introduced, there was never the same level of social concern surrounding digital supplies over the internet as there are surrounding online gambling. The VAT rules were pushed through on pragmatic grounds; namely, that the biggest suppliers would be compliant since they would not wish to be seen to be breaking the law.

There are one or two US-facing operators who demonstrate that, in the gambling world, the biggest companies are not necessarily the most compliant. So where is the stick to "beat" those operators who choose not to obtain a Gambling Commission licence in the first place? Will the Government introduce prohibitions on advertising, US-style restrictions on payment processors, French-style ISP blocking, something else or a combination of measures? Again, these are not new issues and they remain difficult ones to resolve. What is clear is that, in the Gambling Act 2005, the Government's attempt to use the "carrot" of British regulation was, at best, ill-conceived. As a result, the chances are that there will now be many more "sticks" than "carrots" on the agenda.

The Government has announced that the new rules (which, one must not forget are twin-limbed, with the regulatory piece going hand in hand with the tax changes) are needed for social reasons rather than to raise revenue. Although the general assumption is that the real motive behind the changes is somewhat different, by championing the social aspects, the Government should not be surprised when online operators use the social impact of the lack of enforceability of this new extra-territorial tax as leverage in order to attempt to block the introduction of a measure which threatens to affect significantly the profitability of British-facing operators based offshore.