The Horserace Betting Right Consultation

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

On 5 February, the Government issued a consultation on a proposed horserace betting right, that is a right enforceable against gambling operators taking bets on British horseracing requiring them to obtain (for payment) an authorisation.

The proposal represents the latest in an extended debate by the Government concerning reform of the horserace betting levy. Indeed, this is the third consultation in the last year on issues relating to the levy. The first (see our blog posting here), concerned extending the existing levy to offshore operators. The second (see our blog posting here) related to levy reform generally including a proposal for replacing the levy with a rights model. However, that proposal was relatively undeveloped in that consultation paper.

The new consultation is plainly intended to put more flesh on the bones of that proposal. However, the consultation document offers no significant solution to the seemingly intractable problems which always arise in respect of levy reform. Indeed, such a betting right would appear to raise more issues than it resolves.

The proposal

To bring about this new betting right, the consultation paper envisages new legislation requiring all operators licensed by the Gambling Commission to obtain an authorisation from a "racing authority" to offer bets to customers on British horseracing, in effect introducing a new (at least in Great Britain), if rather peculiar form of, intellectual property right.

The appropriate "racing authority" might be a single entity - either specified in statute or to be designated subsequently by the Secretary of State - or the racecourses. The latter option seems extremely undesirable, in theory requiring operators to obtain multiple authorisations to allow them to take bets across different courses. In that scenario, it may be that for convenience the courses would pool their authorisations to allow them to be obtained from a single source. But that would in effect be the former option (albeit with some competition issues potentially arising as well).

As regards a single entity as the racing authority, it has been reported that the BHA is not seeking to be the designated authority and it is suggested that there would be a new body formed reflecting various industry participants (somewhat similar to the existing Levy Board some might say).

Either way, the consultation paper suggests that the racing authority would establish "authorisation schemes" setting out terms and conditions and authorisation fees and a new bespoke tribunal would resolve any disputes.

The consultation paper states that "robust enforcement mechanisms would be central". For operators in Great Britain, the failure to obtain a requisite authorisation could be pursued through the courts (presumably in a claim for damages in respect of the fees not paid or an injunction to prevent the operator taking bets on horseracing). The paper notes that it may be harder to enforce against operators outside Great Britain but suggests this could be done by making any operating licence issued to the operator by the Gambling Commission dependent on the obtaining of any necessary authorisations, with the threat of licence revocation for non-compliance (an approach which could - and probably would - be used against operators in Great Britain as well).

The possible benefits of the proposed betting right

It is not entirely clear what benefits the Government envisages will arise with the proposed betting right.

It may be that as a quasi-intellectual property right, the Government considers that it would be more enforceable in particular against offshore operators. There is no obvious basis for this. The right is unlikely to be recognised in overseas courts. Indeed, as stated above, the consultation paper recognises that enforcement against offshore operators is likely to have to be effected by means of the operating licences issued to them by the Gambling Commission. But this means could be used as easily to enforce an extension of the levy to such operators.

Perhaps more fundamentally, the Government perceives a key benefit being that it would be removed from the process. There is no doubt that the Government considers it to be a highly undesirable chore for it to be the last resort in determining levy schemes, should the Levy Board and the Bookmakers' Committee be unable to reach agreement.

But it is not entirely clear that under the proposed betting right, it would be allowed to withdraw entirely from the process. In particular, someone (and surely it has to be the Secretary of State) has to designate the "racing authority" - which may simply be required at the beginning but one could not rule out that it would require periodic review - and also to establish and appoint members to the new tribunal and continue to appoint replacement members in the future.

So these benefits seem largely illusory.

The issues concerning the proposed betting right

By contrast, there seem some very real issues concerning the proposed betting right. Most obviously, such a significant change will inevitably cause disruption and uncertainty and there will be costs incurred, for example in establishing the new tribunal and the racing authority and in designing the appropriate authorisation schemes.

But more generally, there would appear to be the following issues:

• the policy justification
• the VAT consequences
• the legality of the proposed betting right
• operational issues and the commercial consequences

Policy

There are two important connected policy decisions underwriting the consultation paper.

First, that horseracing should continue to benefit from revenue derived from bets taken on horseraces (which some have doubted). Second, that if there is to be a betting right it should apply only to horseracing and not to other sports.

The consultation paper rejects the suggestion that the additional revenue horseracing has obtained in recent years from sponsorship and the sale of media rights obviates the need for remuneration to the sport to be secured specifically from betting itself. This is on the basis that "the price paid [for media and sponsorship rights does not] reflect th​e total valu​e of British horseracing to bookmakers as a betting product".

And it justifies the betting right applying only to horseracing on the basis of what it alleges to be "unique interdependency" and "mutual interest" between horseracing and betting and that the "history of horseracing is the history of betting".

In fact, greyhound racing has had at least as great an interdependent historic relationship with betting as horseracing. But even leaving that aside, the reasoning here seems rather confused and unconvincing. If the justification for hypothecated funding from betting into horseracing is the historic relationship between the two, it is not clear why payments received from the sale of sponsorship and media rights (which are after all in reality both closely connected with betting) should not suffice. If by contrast the sport is to be considered to have a "value … as a betting product" why can't the same be said for other sports? Although the consultation is at pains to emphasise that the right would only apply to betting, bookmakers will understandably be concerned that a future government may have a different view and that, as in France, the right would be extended to all sports.

A further important policy issue relates to the scope of the application of the betting right. The consultation paper suggests that the proposal is that the authorisation would be required only in respect of bets taken on British horseracing byBritishcustomers. However, it says that a "counterargument" is that operators "benefit from bets placed on British racing from customers outside Great Britain and that an authorisation should cover these bets too" but considers this to be a "point of detail".

Extending the betting right to apply to bets taken by customers outside Great Britain is likely to be problematic. In particular, an operator with a substantial overseas client base betting on British horseracing but with no British customers would require no licence from the Gambling Commission and thus presumably it would require no authorisation in respect of the betting right.

But if such an operator wanted to break into the British market (whether to take bets on British horseracing or other events) it would require a Gambling Commission licence and also have to obtain (and pay for) an authorisation in respect of all the bets it takes on British horseracing, regardless of where its customers are based. In this way, a small amount of additional business could lead to a very substantial payment for this authorisation. That provides a deterrent to operators entering into the UK market, thus reducing choice, and may constitute a disproportionate and thus unlawful restriction.

VAT

A number of commentators have questioned (for example, see Warwick Bartlett here) whether the proposed betting right would be subject to VAT, which the levy currently is not.

The consultation paper itself states as follows:

"While VAT is ultimately a ​matter for HMRC we believe that payments made under any of the authorisation schemes would be unlikely to attract VAT, principally because there would be no direct link between the fees paid and the authorisation to take bets on British horseracing from British customers. ​ This is because sums raised would be used for the benefit of the horseracing industry as a whole, as a betting product, and not provide any direct benefit to the payer of the fee individually."

This is somewhat curious in three ways.

First, applying normal existing principles, it really is not at all clear that payments made in respect of the betting right "would be unlikely to attract VAT". This would appear to be a supply to the operators of a service, at least akin to the licensing of an intellectual property right (which typically does attract VAT) and no obvious exemption from VAT applies.

Second, the reason given - "because … there would be no direct link between the fees paid and the authorisation to take bets [and] because sums raised would be used for the benefit of the horseracing industry as a whole" - makes little sense. Plainly the fees paid by operators would be directly for the authorisations given. And just because the sums raised are going for the benefit of the sport as a whole, that of itself, provides no basis for there being no VATable supply or for the arrangements being outside the scope of VAT. What is a key question is whether the racing authority would be acting in the course of furtherance of business. The question of when public (and similar) bodies do and do not have to charge VAT is a particularly thorny issue and certainly one that would need to be conclusively determined before any betting right was established.

Finally, it is not true that VAT is "ultimately a matter for HMRC" or even the Treasury - at least not entirely. It is in fact a matter of European law and the Principal VAT Directive. Although the Treasury through domestic legislation has some discretion for example as to the rate to be applied in some circumstances, it is not at all clear whether under European law even primary UK legislation could properly exempt the betting right from VAT.

Legality

The document entirely ignores the legal issue which has dogged the question of levy reform for many years. That is whether any reformed system would be compatible with EU law, in particular whether it constitutes unlawful state aid. So far, the concern that the existing levy constitutes unlawful state aid has been limited since it pre-dates the accession of the UK to the EU, which means that it enjoys a privileged status. Although the betting right operates in a different way to a levy, it could still be seen as a hypothecated tax to benefit a specific industry. Moreover, given that it would be a new measure, EU state aid law would apply with full force.

In addition, the betting right, given that it would apply to overseas operators, could be seen as a restriction on the freedom to provide services between member states contrary to Article 56 of the Treaty for the Functioning of the European Union. This would bring into play all the requirements of European law including that it be "proportionate" and "suitable".

So the introduction of a betting right may give rise to significant legal challenge.

Commercial and operational

Finally, it is not at all clear how such rights-based arrangements would operate. Plainly it is envisaged that there would be - at least initially - a negotiation between the operators and the racing authority. Assuming different operators could undertake separate negotiations, would it then be possible for some operators to be able to secure more favourable terms than other operators? Indeed, would it be possible for one operator to obtain an exclusive right?

In addition, what additional terms could the racing authority require over and above remuneration. For example, could it require the provision of information regarding the bets which had been taken or could it control the form of betting undertaken or the presentation of information to the punter? Or could lay or in running bets be entirely prohibited (perhaps justified on integrity grounds)?

These would be substantial extensions in power in favour of racing from the current levy regime.

And what happens if the operators and the racing authority cannot agree, for example in relation to the amount to be paid? The simple answer is that this is to be resolved by the new tribunal. But on what terms will the tribunal determine the dispute?

The current setting of the levy involves all sorts of judgments concerning both the racing and the betting industry, such as how much money is required for various purposes and how much can reasonably be paid. These broad judgments are not something which a normal quasi-judicial tribunal can easily resolve.

At the very least, the sweeping powers of the new tribunal to dictate terms to both industries will put an intense focus on its composition and new members are likely to be scrutinised closely to see which side they will favour. Assuming that the Government appoints tribunal members (and if not them, who would?) this means that the Government is unlikely to free itself entirely from the process. Indeed it may have to retain for itself the key decision- that is appointing the members of the key adjudicatory body.

Finally, it should be remembered that there is not an infinite pot of money available from operators and punters which can be tapped by racing. The more expensive racing becomes as a betting product, the more operators will be incentivised to promote betting on other sports with the result that racing's share of the betting pie will continue its steady decline. Whatever reforms are ultimately effected to the levy and however these are implemented, it is imperative that British racing's overall offering to operators and punters is commercially realistic.

Conclusion

So the betting right seems to solve few of the problems with the levy whilst creating a host of new uncertainties and issues . As a result, it seems likely that the levy system (which the Government announced it would abolish in March 2000) will nevertheless continue for several years to come.

The consultation closes on 12 March 2015.