Pre-Budget Special: A point of consumption gambling duty - "when" rather than "if"?

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

Following HM Treasury's informal consultation on the proposal to move UK gambling duties onto a point of consumption ("POC") footing (submissions for which had to be made by 30 November 2011), George Osborne is expected to announce the commencement of a formal consultation in tomorrow's Budget. Please see our previous articles on this subject herehere and .

We understand that the timetable for the new duty is likely to be as follows:

• formal consultation to commence after the Budget;
• draft legislation to be published in Autumn 2012;
• new legislation to be included in Finance Act 2013; and
• new rules to come into force in 2014.

Whilst these are what we understand to be the Treasury's plans, we've had no word from DCMS as to when we should expect a draft of any new regulatory rules, which are expected to accompany the new POC duty. The new regulatory rules are likely to require primary legislation and, if the rumours that DCMS won't be considering anything until after the end of the Olympics this year prove to be true, it may be that draft legislation implementing the regulatory changes won't be released until 2013. Perhaps this is one explanation for the delay in introducing the new duty rules to 2014? (Another explanation may be that many operators who responded to the first consultation indicated that they would need six months to a year to implement changes to their systems to be able to comply with the new POC duty.)

One way or another, 2014 would certainly seem more realistic than the Government's original target of 2013. However, if one or more operators mount a legal challenge to the introduction of the new rules, we would not be surprised if the implementation date is delayed beyond 2014.

To date, the Government's stated intention is that new regulatory and duty rules will complement one another and be introduced at the same time. The regulatory rules are expected to change such that remote gambling operators based outside of Great Britain (and therefore not licensed by the Gambling Commission) will need to hold a licence from the Gambling Commission in order to advertise, and provide services, to British customers.

The expectation is that the new licensing regime and the new gambling duties will be linked in some way, particularly due to concerns as to the difficulty in enforcing an extra-territorial tax. We assume that that the new rules will operate such that, if an overseas operator does not pay the duty for which it is liable, it will forfeit its licence (and, therefore, its ability to provide services to British customers lawfully). Whether or not there will be other enforcement measures (such as site or payment blocking) for failing to pay the duty or failing to have a licence, remains to be seen. What is certain is that many will question the effectiveness of such enforcement measures and HMRC's ability to police the payment of the new duty by operators established around the world.

The Government's argument is that the two new sets of rules will work in tandem to fix the supposed failings of the current (Gambling Act 2005) regulatory regime and are not being introduced to raise revenue. Although there would seem little or no evidence that the regulatory regimes of the other EEA states, Gibraltar or the current "White List" jurisdictions (Isle of Man, Alderney, Antigua and Barbuda and Tasmania) are in any way failing to protect British customers, the Government's argument is that British customers are exposed to abusive practices as a result of the vast majority of online operators being offshore and not regulated by the Gambling Commission and that those customers would be better protected if all remote operators were licensed by the Gambling Commission. Although there have been comments from the Government (particularly Matthew Hancock, MP for Newmarket) that the new rules are, in part, required to shore-up reducing Levy contributions, the Government has not stated clearly the reasons for the need for a new POC duty.

The widely-held view is that the real reason behind the new rules is to raise badly-needed revenues. This results in some interesting legal questions as to whether the rules will be lawful and, therefore, enforceable. Having commissioned Deloitte to report on the likely effects of the introduction of a POC duty, it would be surprising if William Hill did not now mount a legal challenge against the introduction of the new rules. The Deloitte report seemed to confirm what much of the remote gambling industry has been concerned about; that in an industry with such tight margins, a POC duty payable at a rate set around current levels (i.e. around 15%) would have such a materially adverse impact on the "P+L's" of the smaller operators with significant UK-facing businesses that it would result in them moving from being profitable to loss-making overnight. This would have a number of, currently hard-to-predict, effects. Commentators have suggested that a POC duty set at a high rate would result in a material increase in the grey / black market, increased consolidation in the sector (since the introduction of a new duty liability will require operators to attain a certain critical mass in order to remain profitable) and a decrease in investment into new products and technology. None of these outcomes would be good for British customers.

A change to a POC basis of taxation would seem particularly inequitable for the offshore remote gaming industry which, due to it having been unlawful to operate remote gaming operations from the UK prior to the introduction (in September 2007) of the Gambling Act 2005, has (unlike its remote bookmaking counterpart) always been based offshore. Not only are margins tight in the remote gaming sector due to robust competition in a low tax environment, many games (e.g. roulette) effectively have a "built-in margin" which cannot be adjusted without changing the rules of the game itself. A POC duty set at a relatively high rate would be likely to hit UK-facing remote gaming operators particularly hard.

Until we have more certainty as to the details of the new rules, it will not be clear which legal arguments might be appropriate to challenge the proposed duty and licensing regimes. One likely outcome, however, will be that the remote gambling industry (perhaps led by the RGA) will argue strongly for a twin track system such that the rate of the POC duty payable by remote operators should be set materially lower than the rate payable by bricks and mortar gambling operators. Last year's decision of the European Commission, that Denmark's twin rate system does not constitute unlawful state aid, may well be a cause for optimism for both the UK authorities and/or the RGA that such a twin track system could work in the UK. Whilst the legal position is too complicated to explore in detail here, our view is that relying on the Danish decision as a reason as to why it would be lawful for the UK to bring in a similar regime may be overly simplistic and rather too optimistic. This is largely due to the fact that the state aid analysis is very different where a state, such as Denmark, is opening up its gambling market, as compared to a state, such as the UK, which is now trying to restrict the boundaries of an already open market.

In short, therefore, the scene is set for yet more profound change in the UK's remote gambling market with, as is often the case, changes to the tax regime being the catalyst. Whilst there remains a big question as to "when", it would seem odds-on that the Government will try to introduce a new POC-based gambling duty. However, history suggests that, for all the talk of low rates of gambling duties, the rates that are eventually announced by the Chancellor will be anything but. Since (as Deloitte, William Hill and many others have suggested), a POC duty set at a high rate will have a dramatic and detrimental impact on remote operators, it seems likely that we will soon be seeing some challenges to this new duty proposal.

For further information, please contact Stephen Hignett or David Zeffman.