Gambling

Written evidence submitted by the British Beer & Pub Association (GA 45)

The British Beer & Pub Association (BBPA) makes this submission on behalf of public house interests throughout Great Britain; having worked on the many and varied issues relating to gaming through its specialist panel for many years. Before the introduction of the Gambling Act 2005 the Association had commissioned independent research and provided detailed responses to the Gaming Board, the Budd Committee, the Home Office and DCMS. The BBPA was also deeply involved in the drafting of the Gambling Act 2005, and has been in active contact with the Gambling Commission, DCMS and HMRC on the varied issues relating to gaming machines in recent years.

EXECUTIVE SUMMARY

· The pub sector operates at the softer end of the gambling spectrum and should be regulated and promoted as such. The Gambling Act opened the door to higher-end gambling products and increased accessibility to these formats at the expense of pub machines.

· The BBPA believes that there are no particular issues affecting pub gaming machines which would necessitate any further regulation. However, there are some areas where unnecessary red tape could be removed.

· The triennial review of stake and prize should be restored, in order to increase flexibility in introducing prize increases to assist sectors when they need it most. In the case of Category C machines a £100 prize should be seriously considered to keep the sector viable; a triennial review would normally be due in 2012.

· Treasury plans to introduce a Machine Games Duty to replace the current machine taxation system need to be reviewed as a matter of urgency to ensure that Category C machines are not unduly penalised in converting excise duty and VAT into a single Machine Gaming Duty. Category C machines already pay a high duty rate in relation to their earning potential. We would support an alternative proposal for taxation reform which would involve all betting and gaming being made subject to VAT (with some exceptions that would not prejudice European VAT law of Fiscal Neutrality).

INTRODUCTION

1. The British Beer & Pub Association is the UK’s leading organisation representing the brewing and pub sector. Its members account for 96 per cent of the beer brewed in the UK and own nearly two thirds of Britain’s 52,500 pubs. The pub sector contributes in the region of £20 billion to the economy and employs in the region of 600,000 people. Over 80% of pubs (i.e. nearly 50,000 outlets) are small businesses which are independently managed or run by self-employed licensees.

Machines in pubs – economic significance

2. The vast majority of pubs, around 45,000, are run by individuals on a freehold, leased or tenanted basis as small businesses. There are also around 8,000 managed houses directly run by brewers and pub operating companies. However, pub numbers have been in sharp decline in recent years. There were 60,000 pubs in 2007, around 7,500 pubs have closed over the last four years, with the closure rate still running at 25 pubs a week. Whilst the recent economic downturn has been a factor in this, the sector has also faced cost pressures from absorbing the myriad pieces of legislation and regulation implemented over the last few years. Examples of this include changes to the Licensing Act 2003, the smoking ban in 2007 and the implementation of the Gambling Act 2005 itself.

3. Under the Gambling Act 2005, pubs are permitted to have up to two Category C gaming machines as a right, with the option of a obtaining a permit from the local authority for more than this number of machines. Our best estimate is that there are approximately 60,000 Category C machines in pubs. We also estimate from member surveys and additional input from manufacturers and suppliers, that there are some 25,000 SWPs sited in pubs (i.e. across nearly two thirds of the total pub sector). Whilst in comparison to food and alcoholic drinks machines are ancillary to the reasons as to why people visit the pub, they are however widespread across the sector and an important source additional revenue.

4. Machine income occupies an important place in the economics of the pub industry, a sector that generates in the region of £20 billion per year from drink, food and machines and employs around 600,000 people in full or part-time employment. Machine income contributes significantly to the ability to invest and produce profit. In the many individual small community and rural pub businesses machine income is a very important contributor to the individuals’ income and consequent lifestyle. The growth in competition from other gambling products (further enhanced by the changes introduced in the Gambling Act 2005) is, however, severely affecting the pub industry’s ability to match the level of leisure entertainment increasingly demanded by its customers.

5. Between 2001 and 2011, it is estimated total machine income in the pub sector fell by approximately 25%. At the lowest end of the pub market, such significant income loss is threatening the viability of the pub itself. Machine income loss has a number of different effects depending on the nature of the particular business but has consequences for:

• Employment

• Ability to invest

• Sustainability of individual income

• Sustainability of the pub

• Loss of revenue to the Government through machine withdrawals

6. In order to boost declining machine income, the Association has requested stake and prize increases for Category C machines over a number of years. This has resulted in the current stake and prize limit of £1/£70, which we will be seeking to increase to £1/ £100 in 2012.

The Gambling Act 2005

7. The Association was deeply involved with the drafting and consultation process surrounding the development of the Gambling Act 2005. We had raised concerns that without certain safeguards the Act itself would have had impact on pub gaming machines and the majority of our predictions have been proved, unfortunately, to be correct.

8. Overall, the Association believes that gaming machines are well regulated in pubs under the Gambling Act, and that overall problem gambling is at a minimal level. The current concerns with pub machines lie not with the Act itself, but with current proposed changes to the taxation system that could potentially damage the pub machine sector badly.

SPECIFIC ISSUES RAISED BY THE CULTURE, MEDIA AND SPORT COMMITTEE

How effective has the Act been in its core objectives to:

· Ensure that Gambling is maintained crime-free and is conducted in an open and fair manner

· Protect children and vulnerable people from the adverse effects of gambling

· Update the legislative framework with regards to online gambling

9. The Association believes that the Act has been effective (from a pub point of view) in ensuring that games machines in public houses have been maintained as crime free and conducted in a fair manner, much as it always was. However, it could be argued that whilst the 2005 Act has a number of provisions aimed at preventing crime directly related to the operation of the industry (for example via the Gambling Commission), it is less strong in terms of exposing vulnerable people to harder forms of gambling via the proliferation of high stake and prize machines in accessible locations, and the rise of online gambling. These developments introduced by the Act have negatively affected products at the lower end of the gambling spectrum such as Category C machines in pubs.

10. With regard to protecting children from gambling, the pub sector has always been fully supportive of the 2005 Act outlawing under-18 play on gaming machines. Before the introduction of the Act, the Association introduced a Code of Practice to prohibit play on machines by under-18s in pubs, which was then superseded by the Gambling Commission Code on underage play [1] . BBPA played its full part in the preparation of the Code and supports and promotes compliance with the Code. The Association also reinforced the message on the statutory age of play by distributing stickers for display on all Category C machines in advance of the Gambling Act coming into force, and the sector has taken steps to ensure machines are sited in areas that can be surveyed by staff to minimise the risk of underage play taking place. BBPA is an active member of the Local Better Regulation Office (LBRO) business reference panel, also sitting on the working group looking at enforcement practices surrounding underage selling.

Financial Impact of the Act on the UK gambling industry

11. BBPA can only comment for the pub sector specifically. Part of this decline has been due to factors such as the smoking ban, but also the Gambling Act 2005 reinforced competition from Category B2 machines, commonly known as Fixed Odds Betting Terminals (FOBTs). FOBTs have had a marked impact on Category C machine takings, enticing customers from the softer gaming environment of the pub into venues with B2 machines which offer much higher stakes and prizes. During the run-up to the introduction of the Gambling Act, the BBPA predicted that the Act would produce a significant loss of income from pub gaming machines within five years, primarily as a result of increased completion from other forms of gambling and gaming (particularly B2 machines). Unfortunately this looks to have been proved the case as total sector turnover has decreased by approximately £110m since the introduction of the Act, and overall it has been reduced from over £1bn in 2001 to less that £800m at the current time.

12. In the face of increased competition from FOBTs, the stake and prize level of Category C machines is crucial to the continuing profitability of the pub gaming machine sector. In 1998 the Association commissioned MORI research that indicated customer expectation of prize was around the £60-70 level. This level was not achieved until 2009.

13. The BBPA believes that to secure a viable future for the Category C sector, a maximum prize level of £100 (with no change to the £1 maximum stake) should be introduced by September 2012. The BBPA believes that a maximum prize of £100 would be in the long-term interest of the softer-gaming pub machine sector; and it would have the potential to arrest, and perhaps go some way to recover the decline in machine income over recent years.

14. The Association estimated the implementation cost of the Gambling Act at around £7m for the pub sector, with ongoing costs of circa £3m per annum.

The effectiveness of the Gambling Commission since its establishment, and whether it represents good value for money

15. The BBPA is broadly satisfied with the effectiveness of the Gambling Commission.

The impact of the proliferation of off-shore online gambling operators on the UK gambling sector and what effect the Act has had on this

16. The Association recalls that one of the key reasons given by the Government of the time for the introduction of the Gambling Act was to control the potential harms of online gambling. However, the Act has done virtually nothing to regulate online gambling, and much of this sector remains untaxed as many operators are based offshore. The Association is disappointed that this has become the case, especially since under the new taxation proposals being consulted upon by Treasury online gambling is not addressed. Online gambling draws consumers away from regulated softer end gambling (such as machines in pubs) towards harder unregulated gambling where controls against problem gaming are more difficult.

Why the Act has not resulted in any new licences for casinos or ‘super-casinos’

17. Whilst the BBPA cannot comment on the detailed reasons as to why any new licences for casinos or ‘super casinos’ have been granted, the Association believes that the current level of gambling suits demand and therefore this could be a potential reason as to why no licences have been granted. The BBPA also believes that proliferation of casinos could well damage businesses such as pubs where gaming is at the ‘softer’ end and ancillary to the main business, by drawing custom away from these smaller venues into the large casino complexes that can subsidise food and drink from machine profits. This has been evidenced in areas such as Atlantic City in the United Sates where smaller bars suffered due to construction of super casinos.

The effectiveness of the classification and regulation of gaming machines under the Act

18. As mentioned in paragraph 3, the most important gaming machines to the pub sector are Category C machines. We generally feel that the classification from the old Amusement with Prize (AWP) machine to the new designation of Category C was successful. We also support the Act in giving pubs the option of having one or two Category C machines as a right and this should not be amended in any fundamental way as this is crucial for pub business viability.

19. However, we would suggest some areas where the Act could be amended to allow for more flexibility and consistency in some areas. One issue raised by our members as an administrative burden in the current system, is inconsistency across the country in the application of provisions contained in section 282 of the Act. This provision sets out the notification process for the automatic right for Category C machines that the pub must undergo in order to inform the Licensing Authority (LA) that it is taking up its right for up to two machines. However, some licensing authorities interpret this as meaning every time the premises licence holder changes the LA needs to be notified, despite the fact the LA already has a record of the automatic right at that premises. This is unnecessary bureaucracy that serves no purpose and is in fact an additional cost burden to the business due to the fees attached to the notification process. We would strongly recommend the position is clarified to ensure all LAs are consistent in application of the law in this area.

20. The Association and its members were disappointed that the same automatic right to Category C machines for pubs was also extended to Category D machines, despite our advice to the contrary. As predicted, this has led to regulatory burdens and the prevention of some pubs from operating Category D machines as the automatic right has already been taken up by Category C machines. We would argue for a separate automatic right for Category D machines, a simple amendment to the Act that would remove this piece of unnecessary red tape.

21. The Association also has concerns surrounding Category B2 machines (commonly known as FOBTs) touched upon in paragraph 13. While we are not necessarily unhappy with the classification of these machines, the endorsement of FOBTs by the Act has had a marked detrimental financial impact on the pub sector, given the proliferation of FOBTs and the large prizes on offer. Therefore, we would argue that Category B2 machines should be subject to stricter regulatory controls (such as an operator’s licence) and the taxation of these machines should also better reflect their earning potential and large stake and prize.

What impact the Act has had on levels of problem gambling

22. There have been three major surveys conducted looking at the levels of problem gambling in the UK. Two of these surveys looked at the period before the Gambling Act 2005 came into effect, in 1999 and 2007. The 2010 Survey, published in February 2011, took as an objective the fact that pre-and post-2005 Act implementation should be compared [2] .

23. The 2010 study found that 0.9% of adults were ‘problem gamblers’. Problem gambling prevalence was higher in 2010 than in 2007 and 1999 (0.6% for both years). However, the Prevalence Survey accepted that this small increase was at the margins of statistical significance. The number of people playing gaming machines actually dropped in 2010 (14% in both 1999 and 2007; 13% in 2010) however this was not split out by machine category. Of all gamblers, a low proportion (4%) had problems attributable to gaming machines.

24. Overall, whilst there was a slight rise in 2010 post implementation of the Act, this was of little statistical significance and there is no evidence to suggest problem gambling has significantly increased since the Act came in and not with gaming machines located in pubs.

25. The BBPA and its membership have traditionally supported and promoted responsible gambling, initially via GamCare and latterly thorough the more recent arrangements put in place where contributions are collected by GREaT. The Association and members have contributed in proportion to the amount of gambling involved in the sector, and continues to support research, education and treatment into problem gambling.

OTHER RELEVANT ISSUES

Machine Games Duty

26. The proposed Treasury plans to reform AMLD and VAT taxation system for gaming machines has the very real potential to damage the pub machine sector. The proposals replace the current well-understood system of AMLD and VAT, and instead introduces a two-tier taxation system (Machine Games Duty or MGD) based on a gross-profit tax on machine cashbox [3] . We are still calculating the precise effect that MGD will have on the sector, however the Treasury itself admits that a large number of pubs and clubs will have to deal with complicated partial exemption systems under the proposed new regime, and the sector will struggle to implement and change processes to accommodate an entirely new form of taxation.

27. We are particularly concerned that HMRC proposed to introduce only two rates of MGD that will seek to accommodate the range of excise duty from zero (Category D) to £3055 (Category B1). Category C machines currently attract an excise tax of £905 per annum and their inclusion in a higher rate tax band, which may result from the desire to retain Category D and SWPs at their current rate, will inevitable result in much higher rates of taxation for Category C machines. We do not believe it is fair or just that Category C machines are taxed at the same rate as stake and prize machines where earnings are much higher in bookmakers and casinos.

28. If the rate for the new MGD is set too high for Category C machines, the pub sector overall will be a loser and therefore it is imperative that if the new tax does come in, pub machines must be in the lower band of the new tax. The new tax also attempts to link itself to the Gambling Act 2005 by using prize limits as a definition of banding for the new tax, tying tax legislation and social legislation together which could cause issues going forward. The current AMLD licence allows machines to be tracked by HMRC and this would be lost in the move towards MGD. We have suggested an alternative to that proposed by the Treasury that involves extending VAT to all machine gaming which would have the advantage of encompassing off-shore gambling and being less onerous administratively for the industry. Providing VAT could be applied to the National Lottery, which is feasible, then we cannot see any reason why this approach could not be pursued. If the Treasury pursues its approach of Machine Games Duty then we have great concern that this new tax will be harmful to the pub industry with unnecessary large numbers of ‘winners & losers’ and more complex administration. Irrecoverable VAT is a major issue for SMEs which make up the majority of the pub sector.

June 2011


[1] Gaming Machine Permits – Code of Practice (Gambling Commission, September 2007)

[2] British Gambling Prevalence Survey 2010 (NatCen/Gambling Commission, February 2011)

[3] Implementing a Machine Games Duty: consultation on policy design (HM Treasury, May 2011)

Prepared 17th August 2011