The legal obstacles to the proposed levy reform

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

As we commentedproposalsTFEU last week, the from the Government to reform the Horserace Betting Levy face a number of potential legal obstacles. These relate to whether the levy constitutes unlawful state aid, the statutory powers the Government will seek to use to implement the proposals and the extent to which the proposals will infringe the provisions regarding free movement of services under the EU Treaty, the Treaty on the Functioning of the European Union (“”).

State aid

Under Article 107 of TFEU state aid is prohibited if it:

• constitutes aid granted by a Member State or through state resources;
• is granted selectively to “certain undertakings”;
• distorts or threatens to distort competition; and
• affects trade between Member States.

There is little doubt that the levy constitutes such aid even though it is derived from bookmakers since it is extracted using the state’s coercive power and plainly it is granted selectively since it benefits only Racing.

However, under Article 107 there are exceptions where aid is permitted and Member States can apply to the European Commission for approval under these exceptions. These exceptions include aid:

“to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest.”

The question is whether the levy comes within this exception.

In the document “Implementing the replacement for the Horserace Betting Levy” published last Wednesday, the Government stated that that it would seek state aid approval from the Commission. In 2013, the Commission considered the then new French horseracing levy. It gave its approval on the basis that the French levy system did come within the exception. The Government relies heavily on that approval and seems to think that it should be a relative formality to obtain similar approval for its proposals.

But the approval for the French levy is currently being challenged by the EGBA and RGA at the Court of Justice of the European Union (the EGBA and RGA have a right to bring this claim under Article 263 TFEU because the decision was “of direct and individual concern to them”). There would appear to be good grounds for the challenge.

First, the reasoning of the approval is pretty hard to follow. It seems heavily influenced by the fact that the French levy was part of a liberalising agenda to open up the French gambling market to competition. But it is not obvious why that is a proper justification for state aid. Things may have been even worse in the past but why does that justify what would otherwise be considered still to be distorting state aid?

In addition, there appears to be confusion in the approval over the term “common interest” in Article 107. Plainly, in Article 107 the common interest simply means the public interest. But at times it appears that the Commission is using the term to mean the joint interest of Racing and the gambling operators, which is quite different. (The UK Government seems similarly confused as to the true nature of the necessary “common interest” here, referring in their recent document to “the value of the common interest between betting and racing”.)

But even if the challenge is unsuccessful and the French levy is held to be state aid compliant by the CJEU, that does not necessarily mean that the Government’s proposals are secure because there are major differences between the British and French levies.

First, as noted above, the Commission appears to have had significant regard to the fact that the French levy was part of a set of liberalising measures to open up the French gambling market. That does not apply at all to the British levy. Second, Racing in Great Britain currently benefits from very substantial media rights and other income. That in itself calls into question the appropriateness of the levy. Third, the British levy extends to bookmakers overseas and there are serious questions as to whether the levy is compatible with the right to the free provision of services under TFEU (see below), which does not apply to the French levy.

So for these reasons, it is far from clear that the Government’s proposals will be held to be compatible with European state aid law.

There is also an interesting question about timing. The application for approval is likely to come before the Commission shortly after the European referendum vote in the UK. If that vote is for Brexit, EU state aid law would continue to apply in the interim pending the negotiation of the terms of the UK’s exit (which may last two years or even longer). However, on the basis that once the UK had left the EU, the Commission would no longer have jurisdiction, the approval process may be abandoned (although if the UK were instead to become like Norway a member of the EFTA, one favoured option, it would still be subject to identical state aid rules, albeit with approval to be granted by the EFTA Surveillance Authority).

Conversely if the vote is to remain in the EU, it is hard to know whether the political context would be for the Commission to favour taking an emollient approach to the UK Government or embolden it to take a hard line.

Finally in relation to state aid, it is worth noting that there is a risk that not only the extension of the levy of overseas bookmakers could be considered impermissible, but the existing levy arrangements could be as well.

Statutory powers

The Government says in its document that it will effect the necessary legislative changes by means of secondary legislation made under section 2 of the Gambling (Licensing and Advertising) Act 2014. Subsection (1) of section 2 states as follows.

“The Secretary of State may by regulations made by statutory instrument make provision so as to secure that the bookmakers by whom the levy under section 27 of the Betting, Gaming and Lotteries Act 1963 is payable include bookmakers who are required to hold a remote operating licence….”

It would appear that the reforms which the Government are seeking to make to the levy would include at least the following.

1. Extend levy liability to overseas bookmakers including possibly facilitating the inclusion of an obligation to pay the levy in operators’ Gambling Commission licences.
2. Reform the functions of the Levy Board.
3. Set the rates for levy schemes going forward.
4. Identify the “racing authority” which is to distribute levy revenue and empower it to do so.

In addition, this might be a good opportunity to modernise some of the rather archaic language in the 1963 Act.

Of these, only the first falls squarely within the section 2 powers. The rest (to the extent it is permitted by European law) is likely to require separate legislation.

Free movement of services

Under Article 56 TFEU restrictions on the freedom to provide services between Member States are prohibited unless they meet a legitimate purpose. In the judicial review* brought by the Gibraltar Betting and Gaming Association against the UK Government over the latter’s proposals to extend betting and gaming duty to overseas gambling operators the question arose whether those duties constituted restrictions for the purposes of Article 56 and if so whether they were legitimate.

Those questions have now been referred to the CJEU on the basis that it is at least arguable that they do constitute restrictions and they are not legitimate. A similar analysis arises in respect of the imposition of levy on overseas bookmakers.

In its document, the Government identify two (somewhat overlapping) purposes of the extension of the levy. First to “create a level playing field” and second to “ensure a fair return from all gambling operators to racing” and “to restore to racing a fair contribution from all operators”. Neither of these constitutes a recognised justification for a restriction under Article 56. Moreover, given the other funding available to Racing from the sale of media rights, there is also a question as to whether the levy is proportionate, as would also be required.

So for all these reasons, the legality of the Government’s proposals is problematic. The Government has set out a timetable for the implementation of its reforms by April of next year. On any view, given the legal backdrop, that looks rather optimistic.

* Olswang is acting for the Claimant in this case.

For more information on the impact of these developments, please contact Dan Tench or David Zeffman.