Horserace Betting Levy - Deja vu all over again

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

My partner, Dan Tench, has already given his commentary [see here] on the latest of the many consultations regarding potential reform of the horserace betting levy. However, as someone who has been involved in advising on the Levy for more than a decade and who was a member of Lord Donoughue's group in 2005/6, I thought I would add my own personal perspective.

The Levy is a curious anomaly under which horseracing is the only sport which receives a subsidy provided by statute. It was established in the early 1960s in conjunction with the legalisation of off-course betting at a time when the principal source of racing's funding was the profits of the Tote. Not only is the levy underpinned by statute, the Government appoints three members of the Levy Board and determines the annual levy scheme if agreement cannot be reached between the Levy Board and the Bookmakers' Committee.

At the turn of the millennium, the then chairman of the British Horseracing Board (BHB), Peter Savill, was determined that racing should stand on its own financial footing and developed the idea of replacing the Levy by a commercial arrangement between racing and bookmakers under which the latter would pay a licence fee in return for the right to use data - primarily in the form of runners and riders information. This chimed with the Government which was keen to extricate itself from being involved in the commercial affairs of a sport. As a result, the Government announced in March 2000 its intention to repeal the Levy and the following year, said that "our stated intention is to abolish the statutory levy on horserace betting, on the basis that commercial agreements between horseracing and other industries, including bookmaking, are capable of producing sufficient income for racing to flourish as a national sport without the need for such a levy".

The Horserace Betting and Olympic Lottery Act 2004 gave the Government the power to abolish the Levy. The Government announced its intention to bring the levy to an end on 31 March 2006. However, as is now well known, the BHB's plans came to a juddering halt when the European Court of Justice ruled that the BHB had no database rights (the intellectual property right which was being relied upon) in its runners and riders data. Racing was then faced with the removal of its statutory funding with no viable commercial replacement. It was at that time that the Future Funding of Racing Review Group, chaired by Lord Donoughue, was set up. Our initial recommendation, accepted by Government, was that the abolition of the levy system be put back by three years to March 2009 in order "to investigate options for, and subsequently recommend, a sustainable and enforceable mechanism, compatible with, inter alia, European and domestic competition law, by which those domestic and overseas betting operators using the British Racing product can be required to contribute appropriately to the funding of Racing …".

We submitted our report in December 2005 and considered a number of options for replacement mechanisms. The two to which we gave most attention were (i) a so-called "hybrid commercial arrangement" under which statute would require bookmakers to enter into a commercial agreement with racing in order to be entitled to take bets on British racing and (ii) a purely commercial arrangement based on the collective sale by racecourses to the betting industry of a package of rights to distribute televised coverage of racing and associated data. Our conclusion was that the hybrid scheme faced a number of legal difficulties[1] and would require new primary legislation (which we did not envisage the Government would then be keen to do) and that, subject to competition law advice, the commercial agreement between the racing and betting industries based on media rights represented the most promising option.

At that time the total income received by racing from British and Irish bookmakers (excluding sponsorship) was approximately £143 million (comprising £100 million from the Levy, £30 million for the right to distribute televised live racing into betting shops and £13 million from Irish bookmakers for pre-race data rights). That was therefore the starting point for the amount which our putative commercial arrangement would need to generate (ignoring the impact of irrecoverable VAT).

However, our remit required the levy replacement to be "sustainable and enforceable" and "compatible with … European and domestic competition law". We therefore consulted a competition law QC who had concerns over the collective sale of the television and data rights by racecourses and, as a result, we were not able to recommend to Government our commercial arrangement as being legally bulletproof. As a result, the levy continued in operation as, of course, remains the case today. Before we finished though, there was a third phase of our work which involved consideration of amendments which could be made to the levy system which were not such as to raise state aid concerns. In that Phase 3 report, we recommended that levy schemes should be capable of lasting for more than 12 months subject to a maximum of 5 years; we recommended a procedure designed to minimise the prospects of the Bookmakers' Committee and Levy Board not reaching agreement; and we also made recommendations as to the membership of the Levy Board. Other issues raised by those with whom we consulted included the Levy Board's powers of audit and "hypothecation" of the levy (i.e. that levy should be distributed to racecourses in proportion to the courses' responsibility for generating levy).

As will be seen from the above, many of the issues raised in the Government's latest consultations were addressed by the Donoughue group and by others since then.

Before I turn to the latest consultation, it's worth looking at what has happened to the market since our report. The biggest change was the arrival of Turf TV (using a model very similar to the commercial arrangements recommended in our report) which broke SIS's monopoly leading to a huge increase in the value of TV rights. Indeed, when you look at the figures set out in the latest consultation and compare racing's income with that at the time of our report, whilst levy has fallen from £100 million to £70 million, income from media rights has increased from £30 million to £173 million (although not clear from the consultation, I assume this includes Channel 4's broadcasting fees). So, racing's income just from media rights and the levy now represents around £250 million as compared with £130 million in 2005. Given that the Government's rationale in 2001 for abolishing the levy was to replace it with commercial agreements "capable of producing sufficient income for racing to flourish as a national support without the need for such a levy" I have to ask myself whether that is indeed what Turf TV has achieved. Media rights income alone is now far more than the levy generated at its peak.

Indeed, when John Penrose, the then Gambling Minister, canvassed three options in 2011, the DCMS paper stated the advantages an "independent commercial agreement" would have in that it:

• would ensure fully commercial agreements without Government involvement;
• protects both sides from misbehaviour by the other, but allows the arrangements to be updated as needed with mutual consent;
• creates long term funding stability, sustainability and certainty for both sides;
• creates a level playing field between offshore and onshore betting;
• potentially, creates a level playing field between betting exchanges and traditional bookmakers;
• gives both sides a stake in maximising racing's appeal to punters in future;
• recognises the value of picture rights payments by bookmakers to Racing;
• would be specific to Racing and therefore not set a precedent for other sports.

Most, if not all, of those apply to the media rights arrangements between bookmakers and Turf TV and SIS. (That option proposed by Mr Penrose was basically the same as the hybrid scheme considered in the Donoughue report as the commercial agreement would have been required to be entered into as a condition of bookmakers' operating licences. However, in my view, the legal complications entailed in such a hybrid scheme are not necessary as there is manifestly a commercial imperative on the part of the bookmakers for media rights deals to be entered into). The commercially negotiated media rights agreements require no Government involvement, no rate setting tribunal, no legislation and apply overseas as well as in Great Britain.

So what might be the objections to relying on media rights agreements? Here are some:

• It's largely reliant on LBOs and bookmakers needing televised racing. Well, despite predictions to the contrary over the years, betting shops are not going away and they will continue to want to show televised racing. The objection used to be that online only bookmakers would therefore be free-riders. However, all of the big online bookmakers (whether based here or overseas) now stream live racing and pay Racing for the right to do so. Not all online bookmakers stream live racing but that is each bookmaker's commercial decision to choose to have what may be a less attractive site to racing punters. Likewise, racecourse bookmakers have no need for pictures but the racecourse betting market is in need of a boost and I'm sure would welcome not having to pay the levy or any levy replacement. Moreover, the amount of levy generated by racecourse bookmakers must be a relatively small slice of the overall pie. British racing has also become more popular internationally and this has also led to further income for Racing via At The Races, Racing UK, GBI and SIS. In addition, as shown by the establishment of Racecourse Data Company [see our note here] and the decision of the Court of Appeal in the second FootballDataCo case, there is again a revenue stream which Racing can generate from data.
• This conflates media rights with the Levy. This is Racing's contention which says that the payment for media rights is separate and distinct from the levy which is characterised as a payment for the right to take bets on British racing. But in my view, the latter is an artificial construct. The levy has never been expressed as a payment for anything; it is rather a hypothecated tax. The purpose of the levy is to subsidise Racing in circumstances where commercial income alone would not be sufficient for the maintenance of a healthy sport. But, given the commercial income that Racing now generates, why does it still need a subsidy?
• All the media rights income goes to the racecourses. This is the horsemen's concern as the interposition of the Levy Board at least gives them more scope to influence the way in which the levy is distributed. However, the increasing power of the racecourses is simply a reflection of market reality. But you can't have horseracing without horses and the horsemen have expertly used their bargaining power and position as BHA stakeholder to ensure that racecourses now enter into prize money agreements committing to offer minimum levels of prize money to owners. In the same way as football's increased income has filtered down to players, one would expect the same to apply to racecourses' revenues.
• Small racecourses will close. The argument is that the the racecourses which aren't aligned to one of the two big racecourse groups will not have sufficient leverage to negotiate an equitable deal with bookmakers (albeit that the RCA has previously negotiated collectively on behalf of the independent courses). This is really a political/economic debate about the free market and subsidies which I'd rather not enter into. The only observation I would make is that the two racecourses which have closed in recent years were both owned by ARC (one of the two big groups) and the two new racecourses (Great Leighs and Ffos Las) are both independently owned.

Certainly, Racing has done a fantastic job of growing its commercial income and, if the rationale for the levy is to subsidise what would otherwise be an unviable sport, it is difficult to maintain that this subsidy is still required. That said, however, abolishing the levy would remove £70 million from racing's income. Perhaps the answer is for Government to set a date for abolition of say five years hence coupled with a phased reduction in the amount of the levy (under a five year levy scheme). If, by the end of year 4, Racing's commercial income has not further grown sufficiently to compensate for the disappearance of the levy, the Government can always postpone abolition.

[1] Interestingly, we sought the views of DCMS who also saw great difficulty in utilising the Gambling Act 2005 as the basis for the hybrid scheme because the Act's licensing objectives have nothing to do with the provision of financial support for racing.