Memorandum submitted by HM Treasury
1. The Culture, Media and Sport Committee
has requested evidence from HM Treasury concerning the tax neutrality
of Lottery Duty. The Government is pleased to be able to assist
the Committee's enquiry, as it did in 2000-01, and I welcome the
opportunity to submit this memorandum to the Committee and to
provide oral evidence subsequently on the Government's approach
to tax policy and Lottery Duty.
2. Lottery Duty is calculated as a percentage
of gross receipts from ticket sales and was introduced under Finance
Act 1993. The Government of the time made clear that a National
Lottery should be subject to taxation because much of the money
spent on the Lottery would be diverted from other forms of expenditure,
including gambling and general consumer expenditure. Therefore
if the stakes were to bear no tax, the Government's revenues would
fall and would have to be made up by other forms of taxation.
3. A rate of 12% was set for Lottery Duty
in 1993, which the previous Government argued was broadly tax
neutral and would maintain tax revenues, whilst ensuring that
the National Lottery paid a fair share of taxation, offered attractive
prize levels to participants and raised substantial sums for good
causes.
4. When the Committee last inquired into
the Lottery in 2000-01, HM Treasury provided evidence setting
out this Government's interpretation of the figures underpinning
the analysis of revenue neutrality, which acknowledged difficulties
in calculating precisely what the revenue neutral rate would be,
but concluded that 12% remained within the range of revenue neutralising
rates:
It is impossible to know exactly what the revenue
neutral rate of lottery duty is, because we do now know precisely
what expenditure patterns would be if the National Lottery did
not exist. However . . . the balance of probability indicates
that the revenue neutral rate of Lottery Duty is at or around
12%[1]
5. The Lottery is now a well-established
product and has been an integral part of British life for a decade,
with around two-thirds of the population playing regularly. It
is technically impractical—and increasingly irrelevant—both
to calculate a theoretically `neutral' rate of Lottery Duty and
to make reliable judgements about the design of tax policy against
the counterfactual proposition ". . . if the Lottery did
not exist". This difficulty becomes more acute, the longer
the period after introduction.
6. Furthermore, since the Committee's previous
inquiry, there have been significant changes in the gambling sector
and major reform of gambling duties. A programme of modernisation
was introduced in response to significant commercial and technological
changes in the industry environment and evidence that a gross
profits tax (GPT) system could deliver a more efficient way of
taxing gambling businesses than the existing taxes on gross stakes
or the licence-based system for machines. A table setting out
progress in modernising the gambling taxes since 2000-01 is attached
at Annex A.
DISTRIBUTION OF
LOTTERY RECEIPTS
7. The distribution of lottery revenue is
governed by the terms of the licence issued to Camelot Group Plc
under section 5 of the National Lottery Act. The current breakdown
of each pound spent on the Lottery is set out in the table below.
|
| Prizes to winners | 50%
|
| Good Causes | 28%
|
| Lottery Duty | 12%
|
| Commission to retailers | 5%
|
| Operating costs | 4.5%
|
| Profit to Camelot | 0.5%
|
|
8. The table below describes trends in Exchequer receipts
from Lottery Duty. The rate was set at 12% at its inception, and
has remained unchanged under this Government. The National Lottery
operator, Camelot Group Plc, is the only company which pays lottery
duty. Other lotteries for commercial gain are illegal and society
or local authority lotteries are exempt from duty.
|
| Lottery Duty £m
| % change | % total gambling tax
receipts from Lottery Duty
|
|
| 1994-95 | 104
| | |
| 1995-96 | 612
| | 39% |
| 1996-97 | 558
| -9% | 39%
|
| 1997-98 | 675
| 21% | 43%
|
| 1998-99 | 628
| -7% | 41%
|
| 1999-00 | 609
| -3% | 40%
|
| 2000-01 | 596
| -2% | 39%
|
| 2001-02 | 580
| -3% | 40%
|
| 2002-03p | 550
| -5% | 43%
|
|
CURRENT POSITION
9. In the context of significant changes in other gambling
tax regimes and the flaws apparent in an approach based on an
`alternative universe' in which the Lottery does not exist, the
Government believes that tax policy judgements about Lottery Duty
should be developed on the same principled basis as we have now
established for other gambling regimes. That means that gambling
taxes should be:
— efficient and fair—the regimes should
be economically efficient, delivering a fair revenue yield to
the Exchequer and ensuring that this contribution is divided between
different activities in an appropriate manner;
— sustainable—provisions should be
sufficiently flexible to cater for changes in the environment,
for example new social law, market changes and technological innovation;
and
— business-friendly—compliance costs
should be minimised. Annex B sets out, as an example, how these
principles applied in practice to the reform of General Betting
Duty.
10. Clearly, analysis of the degree of relative tax neutrality
in any option for change to the structure or rate of a tax is
likely to be one factor in the judgement that is taken about the
"right" level of taxation. However, this broader basis
for policy judgements regarding the gambling taxes, including
Lottery Duty, allows us to:
— establish consistency in methodology and analysis
across the different gambling tax regimes and forms of gambling
activity;
— build more effectively into the tax policy development
process recognition of, and adaptability to, future developments—for
example the emergence of innovative gambling products; and
— take into account recent evidence about how the
structure and rate of taxation—for example, the use of a
gross profits tax regime—can affect the displacement of
expenditure within and between different forms of gambling and
other expenditure to a greater degree than we assumed in 2000-01
before we began our reforms.
CURRENT ISSUES
11. It is under this framework that the Government would
therefore consider current and future issues or developments relating
to the taxation of the Lottery, including:
— any proposals for changes to the rates or structure
of Lottery taxation, including the scope for a gross profits tax
structure, within the broad context of maintaining Exchequer revenues;
— rapid and potentially far-reaching developments
in the Lottery sector, market and regulatory system including:
— proposed licensing changes;
— the proposal for an Olympic Lottery (evidence
suggests that around 60% of receipts would come from diversion
from other Lottery products); and
— greater use of scratchcards and online playing
of the Lottery; and
— the implications of changes in other gambling
tax regimes and potential reforms of gambling regulation, as proposed
in the draft Gambling Bill currently the subject of inquiry by
the Joint Committee on the Draft Gambling Bill.
1
Note sent to the Committee by Andrew Smith, then Chief Secretary,
26 March 2001. Back
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