Memorandum from the Economic Secretary
to the Treasury on the Gambling Bill and Taxation (DGB 95)
BACKGROUND
1. There are six different duty regimes
covering general betting, pool betting, bingo, casino gaming,
machines and the lottery. Duty structures and rates vary considerably
as do the yields from the various duties. In total the gambling
duties contribute around £1.3 billion per annum to the Exchequer
with an additional £0.3 billion being raised through the
VAT system.
Details of gambling duty revenues, structures
and rates are set out at the end of this Document.
THE MODERNISATION
PROGRAMME
2. During the last two years the Government
has significantly modernised gambling duties. While there had
previously been significant shifts in the relative rates of tax,
the structure and design of most gambling taxes had remained largely
unchanged since the 1960s.
General Betting
3. The current programme of reform began
in 2000, when the Government launched a review of General Betting
Duty. The main catalyst for this was the growth in telephone and
internet betting which led to a drift towards offshore, "tax
free" betting by bookmakers, which put the UK tax base and
jobs under threat. Other factors influencing the Government's
decision to begin modernising the gambling regimes were:
— the perception that many of the gambling
taxes had become unwieldy, outdated, and overly complex both to
comply with and to administer;
— evidence that a gross profits tax
system could deliver a more efficient way of taxing businesses
than the existing turnover or license-based duties; and
— technological innovations which have
recently challenged the relatively inflexible asset-based approach
to taxation (eg taxation based on physical player positions and/or
machine terminals).
4. Supported by independent academic research,
the Government saw a strong case to abolish the duty on punters'
stakes and move to a tax on bookmakers' gross profits. We believed
that this gross profits tax (GPT) would:
— be more efficient, taking into account
a businesses ability to pay;
— reduce barriers to entry, increasing
the efficiency of the market;
— encourage businesses (in this case
bookmakers) to adopt high turnover/low margin strategies and enable
them to compete in an increasingly international market; and
— lead to lower prices for punters.
5. After discussion with the bookmakers
a GPT of 15 per cent was introduced on 6 October 2001. One year
later an evaluation of the new regime was carried out to measure
the impact of the new regime. This showed that the new gross profits
model was more effective, fair and sustainable than the previous
regime and had the overwhelming support of the industry. Exchequer
revenues were in line with initial projections. Academic research
showed that the increase in betting turnover during the first
year of GPT was in line with expectations and had led to the creation
of over 2,000 new full and part time jobs.
Pool Betting
6. Following early positive indications
of the success of reform of general betting duty the Government
took the view that it was right to extend the new tax model (GPT)
to the pools industry. The football pools had been in dramatic
decline since the introduction of the National Lottery. Successive
attempts were made by the Government to "bail out" the
pools industry by reducing the duty rate. However in Budget 2002
the 17.5 per cent duty on pool betting stakes was replaced by
a 15 per cent duty on gross profits. This change was well received
by the industry and an early benefit was to secure continued funding
by the largest pools companies of foundations for sports and the
arts (equivalent to 4 per cent of gross profits).
Bingo
7. In the 2002 Pre-Budget Report, after
a period of formal industry consultation, the Chancellor announced
that a gross profits tax would replace Bingo duty. The change
to a 15 per cent GPT for the Bingo industry was introduced in
the 2003 Budget and implemented on 27 October. Bingo participation
("par") fees remain subject to VAT.
Machines
8. Gaming Duty has long been gross profits
based so currently only the machines sector with Amusement Machine
Licence Duty (AMLD) and Lottery Duty have not moved to a gross
profits model.
9. In July 2003 the Government launched
a consultation document on the reform of AMLD, which outlined
the arguments for reform of the current licence-based system.
A move to GPT is one of the options. The formal consultation period
ended on 6 October and, as the 2003 Pre-Budget Report confirmed,
the responses are under careful consideration and a summary of
responses will be published shortly.
DEREGULATION OF
GAMBLING—THE
TAX ISSUES
10. The objectives for reform set out by
the Government in the Regulatory Impact Assessment accompanying
the draft Bill could be achieved without any changes to tax policy.
For the industry, deregulation is the foundation for future developments.
However, we recognise that there are clearly other dimensions
that the industry see as being important factors in their decision-making.
These include the way in which planning policies affect location
decisions, as well as the structure and rates of taxation. The
proposed programme of deregulation raises a number of challenges
and issues on tax.
11. While the issues are clear—and
the key tensions are outlined below—any further reforms
would not be straightforward and would be likely to create winners
and losers within the existing industry. As outlined below, for
example, the recent consultation exercise on reform of machine
taxation has underlined this point.
12. We recognise that the industry would
like certainty about the future tax regime to inform their business
planning. However, it is not possible to make evidence-based policy
decisions on tax until there is sufficient certainty about certain
central features of the new regulatory regime and we have a clearer
picture of estimated implications, for example, the size and distribution
of the new market, the overall increase in gambling activity and
the scale of diversion from other leisure activities.
13. The Government has made proposals on
certain regulatory details, which will not be defined in primary
legislation but will be set out in regulations. These include
minimum gaming floor sizes and the number of gaming machines permitted
for each table game. Such factors will be important in the economics
of casinos, and therefore analysis of future tax options can only
be accurately modelled as the detail of the new regulation and
how it is likely to be applied in practice becomes more definite.
14. Similarly, it is sensible for tax decisions
to include consideration of how certain types of gambling activity
are classified for regulatory purposes. In some cases, such regulatory
proposals have only recently been made and are still subject to
confirmation. For example, the proposal that casino games that
do not require human intervention (eg versions of touch screen
roulette where the ball is mechanically fed into the wheel or
any games where the outcome is generated by random number generator)
would be classed as gaming machines.
15. Given such outstanding uncertainties,
together with the need for continued work on how the market is
likely to develop in response to the Gambling Bill proposals,
we are still in the very early stages of modelling work on tax.
It is therefore not yet possible to provide the degree of clarity
on tax structures and rates that the industry is seeking.
Impact of new business models
16. By following the differentiation between
gambling activities enshrined in existing social legislation,
much of which dates from the 1960s, the various gambling tax regimes
have effectively evolved in silos. The Gambling Bill introduces
the prospect of new business models, such as "resort style"
casinos, offering a wider range of gambling activities within
a single venue. The erosion of the traditional boundaries between
discrete gambling activities may raise questions about the suitability
of the current tax structure and also raise issues around compliance
costs and the administrative efficiency of such a system.
17. Multi-gambling activity venues might
prefer a comprehensive tax to cover all activities, perhaps some
sort of GPT. However this approach would not necessarily suit
all gambling outlets: some sections of the machines sector, for
example, would prefer the status quo. Opinions are also likely
to be divided on whether VAT should apply to any gambling activity.
This could have a significant impact in terms of an operator's
partial exemption status and in respect of recoverable input tax
on capital expenditure.
18. These issues illustrate the complexity
of the gambling industry and the potential for conflicting interests
within it. They also raise questions about the feasibility and
desirability of applying the same tax regime to multi-gaming activity
venues such as casinos, bingo halls and bookmakers as to premises
that just have machines, such as pubs and arcades.
Taxation Of Machines
19. Machines are currently a feature in
all the existing gambling sectors and will be an increasingly
important dimension to the gambling industry after deregulation.
The issue of whether to reform AMLD or not will receive added
weight with the introduction of new unlimited stake/prize casino
slot machines which are likely to be the economic engine of new
casino business models. These will need to be brought into the
duty net, either within existing duties or under a new tax regime.
20. AMLD is inequitable in that it does
not recognise the substantial variation in the earnings potential
of different machines in different locations. It has also been
suggested that the existing licence fee can act as a brake on
innovation and technical development. Recent independent academic
advice supports the economic rationale for a move to a gross profits
tax and there is a good argument that GPT would be a fairer and
more modern approach to machine taxation in principle. However
there has been a mixed response from industry to the idea of a
move from a specific licence on machines to a GPT system. Some
of the larger business organisations are in favour of moving to
a GPT regime in principle, subject to concerns about rates, but
have urged caution on the timing, pointing to the need to link
any major changes to the tax regime to implementation of new social
regulation. These include the British Casino Association, The
Gala Group, and Leisure Link, the UK's largest machine provider.
The main amusement machine trade body, The British Amusement and
Catering Trades Association (BACTA), strongly favour improved
administration of the present system based on industry self-regulation,
rather than moving to a gross profits based model.
Casino Taxation
21. It has been widely argued by the industry
that the current banded system of gaming duty, which has marginal
tax rates ranging from 2.5 per cent-40 per cent, would be incompatible
with the very large scale investment required for major casino
developments and would therefore inhibit the growth of the industry
after deregulation. However tax is just one factor that industry
will be considering, and it is clearly and understandably in their
interests to argue for the lowest possible rate. Government recognises
that the existing structure of gaming duty, which is levied on
casino table gaming, suits the existing niche industry but needs
to consider whether it is appropriate to the new mass-market business
models which are expected to appear after deregulation.
22. In recent months we have been consulting
informally with representatives of the UK casino industry and
with potential overseas investors in order to understand the issues
and concerns they have. It should also be noted that the importance
of machine gaming within the new industry environment means that
the tax regime for machines may be just as significant for many
casinos, depending on the product mix offered.
Remote gaming
23. The Gambling Bill will allow remote
gaming to be licensed within the UK for the first time and this
raises the question of whether this business activity should be
treated in the same way as its premises-based equivalent—as
is currently the case for remote betting—or whether a different
tax treatment is required. The argument is made by the internet-based
gaming industry, that remote gaming products should be taxed at
an ultra low rate in order to attract business to the UK in preference
to other low tax well regulated jurisdictions. Although we recognise
that the global nature of the internet means that domestic duty
rates will have a significant impact on the size of the UK remote
gaming industry, the case is not clear cut and raises a number
of complex issues including:
— balancing the interests of the remote
and premises-based industries, and concern to avoid the possibility
of tax induced market distortion;
— balancing the benefits of attracting
new business to the UK against the potential threat to the existing
tax base, for example by creating opportunities for manipulation
of place of supply;
— implications for taxation of remote
betting; and
— likely differences in commercial
practice and cost base between the different remote platforms
eg internet and interactive digital TV.
Timescales
24. We are aware that potential investors
are pressing for an early indication of the likely tax environment,
particularly in respect of casinos, to inform business planning.
Others within the UK industry argue that the tax issues cannot
be resolved until the deregulated environment is more firmly defined.
Gambling tax law is generally consistent with social regulation,
so any future tax reforms should be closely aligned to the progress
of the Gambling Bill. The Government is therefore clear that reform
of gambling taxes should be undertaken in concert with changes
to the regulatory regime. In recognition of the interdependencies
between deregulation and tax, officials from Treasury Departments
and DCMS are actively working together.
December 2003
GAMBLING DUTIES: CURRENT STRUCTURES, RATES
AND REVENUES
STRUCTURE AND
RATES
|
| Duty | Rate
| Basis | Other |
|
| Lottery | 12 per cent |
Stakes | 28 per cent to good causes
|
| General Betting | 15 per cent
| Gross Profits | Lower rates for spread betting firms (3 per cent financial/10 per cent sports)
|
| AMLD | £250-£1,860 per machine p/a
| Licence fee | VAT on gross profits
|
| Gaming | 2.5 per cent-40 per cent
| Gross Profit Bands | VAT on participation fees in card rooms
|
| Bingo Duty (from 27 October 2003) | 15 per cent
| Gross profits | VAT on participation fees
|
| Pool Betting | 15 per cent
| Gross Profits | 4 per cent of major promoters' gross profits to sports and arts until March 2004
|
|
REVENUE YIELD
(£M)
|
| Duty | 1998-99
| 1999-2000 | 2000—01
| 2001—0 | 2002—03
|
|
| Lottery1 | 628
| 609 | 596
| 580 | 550
|
| General Betting | 480
| 492 | 487
| 433 | 304
|
| Amusement Machine Licence Duty (AMLD) 2 |
157 | 160
| 153 | 155
| 149
(+250 VAT) |
| Gaming3 | 91
| 107 | 129
| 129 | 151
|
| Bingo4 | 105
| 107 | 114
| 116 | 122
(+57 VAT)
|
| Pool Betting | 70
| 38 | 30
| 26 | 16
|
|
| Total | 1,530
| 1,513 | 1,510
| 1,439 | 1,289
(+307 VAT)
|
|
1 Applies to the National Lottery not on other types of lawful lottery such as those run by charities.
2 Not all the amusement machines liable to AMLD are gambling products—for instance pinball and some quiz machines.
3 Applies to casino table gaming. Casino jackpot machines are liable to AMLD.
4 Applies to commercial bingo clubs.
|
| 
