Supplementary written evidence submitted by William Hill (GA 101)

Further Submission to the DCMS Select Committee by William Hill on the Regulation and Taxation of Online Gambling

William Hill has commissioned both a legal and regulatory analysis on the online gambling market and economic modelling concerning the effect of a point of consumption tax (at various levels) on that market.

At the point the Select Committee called for evidence and at the time William Hill gave oral evidence to the Committee, this work had not been fully completed, the first report being used by Deloitte as a reference source for their later report.

Furthermore, we are aware that the Committee has received views from other gambling sectors and companies which make the case for harmonisation of gambling taxes (online and retail), on the basis that imposing the same tax rate for retail and online would in some way "level the playing field" between retail and online and in some way alleviate the regulatory, tax and commercial problems of the retail sector.

We are clear that the above proposition is a complete misnomer which will give no boost to retail and only serve to damage the online industry (certainly as far a sports betting and gaming is concerned). William hill has both a substantial UK retail business (75% of group revenues) and an online business. We are clear that whilst there is some limited overlap between retail and online currently the two businesses have largely different demographics.

Most importantly, it is important to note that online margins are around half those of retail because of the highly competitive nature of the online market.

Whilst DCMS policy to regulate offshore online operators is predicated on the basis of "increased public protection", these two reports demonstrate that a double figure rate of taxation attached to regulation would increase rather than decrease public protection risk.

At a 15% rate what is currently a highly competitive and broadly well regulated online market (with margins half those in retail) would experience significant market disruption.

A number of smaller online operators would see their operating margins eroded to the point where market exit was almost inevitable. This could lead to some two fifths of UK consumers (at a 15 percent tax rate) migrating to the grey or black market as firms would still be able to target the UK market.

With no government having successfully established effective enforcement mechanisms over their online market (France being the most extreme example of grey market leakage-70 percent) a policy of imposing tax on top of regulation could open up the UK Government to the prospect of legal challenge under EU law as it attempts a "controlled closing" of the UK gambling market (tax can only be a beneficial consequence of regulation and not the primary reason for closing the market).

The Gambling Compliance report shows that no European Government (particularly France and Italy) have been able to control consumer behaviour when those consumers are focussed on the best commercial offering which includes prices and a wide variety of markets.

The main findings of the Deloitte report are:

· The highly competitive online environment means that operators would be unlikely to be able to pass a significant proportion of any POC tax through to consumers.

· Given the low returns that a significant proportion of the smaller operators currently earn, even relatively low levels of POC tax could force some of the smaller firms to exit the online gambling market.

· International evidence from jurisdictions such as the US, France and Italy indicates that many of the regulations introduced in these markets have failed to prevent the emergence of a large unregulated sector. These examples highlight the potential for customers to switch between licensed and unlicensed sectors, and point towards some of the challenges that are involved in introducing effective measures to prevent this occurrence.

· Consistent with this, modelling by Deloitte suggests that, under a reasonable set of assumptions, and in the absence of effective enforcement procedures, a 5% POC tax would distort competition leading to as much as 13% of UK online gambling consumer revenues moving into the grey market. Up to 27% of business could move into the grey market at a 10% POC tax rate.

· The likelihood of this consumer response serves to raise concerns over the impact of the POC tax on the Government’s over-arching consumer protection policy objectives.

· Unless enforcement is effective, the growth of the grey market would also serve to reduce the scale of potential tax revenues. The modelling undertaken by Deloitte suggests that under ineffective enforcement scenarios the tax raised could peak at a 10% rate, with further increases in the rate leading to declines in revenue as the grey market attracts an increasing proportion of consumers

Key implications

· Effective enforcement of the tax and licensing regime are essential to achieving the consumer protection objectives of the policy and maximising tax revenues by limiting the size of the grey market. The ability of governments to overcome the challenges with enforcement will depend on a range of factors, including the degree of investment in enforcement measures, the legal framework and degree of multilateral coordination and cooperation by governments.

· The international examples indicate that enforcement is challenging, with no existing system proven to be entirely effective and some jurisdictions losing significant shares of the market to the unlicensed sector.

· For these reasons a cautious approach to the introduction of a POC tax appears to be appropriate. Setting an initial tax rate below 10% would be consistent with minimising the risk of promoting a grey market, while allowing:

· Further evaluation of the impact of a POC tax on UK online gambling operators.

· Lessons to be taken from the effects of new but relatively high POC taxes in markets such as Spain.

· The development of effective enforcement mechanisms to limit the ability of grey market operators to target UK consumers.

It is possible for the UK Government to levy a lower rate of tax on online gambling operators than retail operators. A recent EU state aid case concerning the newly liberalised Danish gambling market found that the decision to have a lower rate of tax for remote gambling is in line with EU state aid law because the positive effects of the liberalisation of the sector outweigh potential distortions of competition.

Like others, we want a fair deal for our retail business in terms of tax and regulation, but achieving this through imposing an unsustainable tax burden on the online market is not the right vehicle.

We believe that the two reports in question, " Online Gambling Regulation (striving for sustainability, player protection and competition)" and the Deloitte report on the impact of a point of consumption tax are perhaps the first authoritative independent assessments that have been conducted in this sector.

They provide, in our view, important structural, economic, legal and regulatory information about the remote gambling industry which has also been shared with DCMS and the Treasury.

We would ask that this note and the two reports are tabled as evidence for consideration by the Committee.

January 2012

Prepared 27th January 2012