Supplementary memorandum from the Association
of British Bookmakers (DGB 145)
During our appearance before your Committee on 20th
January 2004, we undertook to provide additional views and information,
including an expert analysis of the draft Gambling Bill. This
is being prepared by Stephen Monkcom QC and will be submitted
both to the Committee and to DCMS as soon as possible.
Another matter on which we undertook to write
concerned Mr Meale's question about "industry starting prices".
We responded immediately on that point and you should have received
a copy of our letter to Mr Meale. If any further questions arise
from that letter, we will be pleased to answer them.
An important topic raised both in our evidence
and that of the betting exchanges two days later concerned the
issue of whether the exchanges are bookmakers.
As Mr Meale so graphically demonstrated in his
questioning, it is extremely difficult for the exchanges to sustain
the claim that the business they are engaged in is that of bookmaking.
In saying this, we rely not only on the Betfair brochure which
clearly states that Betfair is not a bookmaker, but also on a
reasoned analysis of the activity undertaken by the exchanges.
It is obvious that although obtaining a bookmaker's
permit is undoubtedly a prerequisite to conducting business as
a bookmaker, the simple fact of possessing a permit is not sufficient
to establish the holder as a bookmaker.
For example, any member of the Scrutiny Committee
could apply for and be granted such a permit—but would anyone
seriously argue that the possession of a permit alone would make
him, or her, a bookmaker?
Put simply, the question that needs to be asked
is whether the permit holder is trading as a bookmaker by laying
bets and accepting the risks which go with that business? If he/she
is carrying out both of these activities then he/she is a bookmaker.
It is abundantly clear that the betting exchanges
do not either lay bets or accept the risks that go hand in glove
with such trading. The exchanges' own evidence made clear that
they do not trade in the same way as a traditional bookmaker and
that they do not accept risk because they match every bet.
The exchanges argued before the Committee that
bookmakers also do not take risks, but this is self-evident nonsense.
The industry lost some £20 million at last year's Cheltenham
Festival and some £30 million when Frankie Dettori rode all
seven winners at Ascot. In addition, one company alone lost £12
million on Europe 2000. These examples clearly demonstrate that
bookmakers can lose as well as win and that, by any standards,
they incur risk. The exchanges, on the other hand, will have earned
substantial commission income from the very same Cheltenham races!
Also on the question of risk, the representative
of Betfair claimed in oral evidence that in the event of his company
failing to match a bet "we are perfectly at liberty to take
that bet on our own account". He agreed, however, that, in
general, bets were matched immediately.
This statement begs a number of questions; how
many bets struck through the exchanges are, in fact, matched immediately,
how many are not matched at all, what happens in such circumstances,
and on how many occasions Betfair (and the other exchanges) actually
do as Mr Davies described and "take that bet on our own account"?
We respectfully suggest that the Committee might wish to request
clarification on these points.
Under the terms of the draft Bill, the exchanges
are to be licensed as "betting intermediaries"—
leaving their customers totally unregulated, apparently on the
assumption that such customers will all be betting for recreational
rather than business reasons. This is naive and runs counter to
the facts, for in addition to on-line users, high street premises
are being set up specifically to conduct business through particular
exchanges. Nor should it be assumed that recreational betting
is the same as one-to-one betting; a layer on the exchanges can
be trading with an unlimited number of punters.
In reality, what we have is a situation in which
potential bookmakers, who may not be able to satisfy the current
"fit and proper" criteria, have (and will continue to
have) the immediate option of laying bets on an exchange and representing
their activities as recreational, thereby avoiding all regulatory,
tax and levy obligations. This cannot be desirable, particularly
given the Government's stated objectives of fairness, keeping
crime out of gambling, and protection of the public and it remains
our firm view that those who lay bets on exchanges should be required
to pass the "fit and proper" test and pay tax and levy
like any other bookmaker.
Also undesirable would be a situation in which
a member of the public took up a position in the betting ring
at a racecourse and offered to lay bets. Our reading of the draft
bill indicates that this would be possible if the individual in
question maintained that he was acting in a purely recreational
capacity. We find it hard to accept either that this promotes
the objectives of the Bill, or that it was ever the Government's
intention to create such a situation.
Another example of business being conducted
through the exchanges was identified in Mr Stevenson's oral evidence
to the Committee in which he drew attention to what he regarded
as the undesirable impact of an increasing number of racecourse
bookmakers using the exchanges as a business tool, with significant
consequences for the critical starting price mechanism of horserace
betting.
When the Committee questioned the exchanges,
it was stated by one witness that only 0.71 per cent of the customers
of the exchange he represented made "more than £15,000
per year". This may be a small percentage, but the witness
then went on to say that his company had around 200,000 account
holders.
It will not have escaped the Committee's notice
that 0.71 per cent of 200,000 is 1,420. Given that there are around
1,200 active holders of bookmakers' permits trading off-course
in this country, it follows that there are more people trading
profitably on this single exchange than there are professional
off-course bookmakers.
Accordingly, if the defining threshold of recreational
laying on the exchanges was set at the level of capital gains
tax, as Mr Bell suggested in evidence to the Committee, clearly
the number of non-recreational layers would substantially outstrip
the number of professional bookmakers. This is one of the principal
reasons why the ABB and its members are so concerned about a situation
that the Government seems prepared to let expand without proper
control.
You asked for a simple example of the difference
in tax (and levy) payable by traditional bookmakers and the exchanges.
In absolute terms, the exchanges are right to
say that they pay tax on the same basis as traditional bookmakers
because, like the latter, they pay 15 per cent of their gross
profits in tax.
A key difference, however, is that bookmakers
earn their gross profits from winning those bets placed by losing
punters; whereas the exchanges make their income from charging
commission to whoever emerges the winner (punter or layer) from
a particular transaction.
Thus, if a punter loses £100 to a traditional
bookmaker, that bookmaker will pay £15 in gross profits tax
and, if the bet is on a British horserace, £10 in levy. But
if the same punter loses £100 to an anonymous layer on a
betting exchange, the successful layer will be liable only for
a commission charge of, typically, 2.5 per cent—or £2.50.
The exchange thus earns £2.50 in commission,
of which it pays 15 per cent (37.Sp) in tax and 10 per cent (2Sp)
in levy—a total contribution of 62.5p, compared with the
total of £25 paid by a bookmaker.
This why it is not acceptable for the exchanges
to claim that they pay levy and tax in the same way as bookmakers.
The real issue is not the rate, but the fact that the base on
which such rates are calculated is totally different.
Commission paid to betting exchanges for the
right to operate within a marketplace is emphatically not the
same base as the profit earned by businesses operating within
that market place. This is why we continue to argue that such
businesses should be identified and taxed on the profits they
generate, in the same way that betting businesses operating outside
the betting exchange marketplace are tax and levied.
There is another misconception about betting
and taxation. Betting exchanges are happy to promote their business
model by stating that it simply cuts out the middle man (the bookmaker),
thus allowing the punter to achieve better odds.
The better odds do exist, but only because no
unlicensed participant in the exchange marketplace pays tax or
levy, whereas bookmakers pay both on behalf of their customers
out of their profits. The advantage for the exchanges, therefore,
is not so much cutting out the bookmakers as avoiding the fiscal
burdens the bookmaker must bear.
Since the deduction was abolished, clearly a
bookmaker has to price his bets in such a way as to cover the
cost of tax and, where applicable, levy, whereas an exchange layer
does not. This is why we contend that the fiscal playing field
is not level and that if this imbalance is not rectified, the
exchanges will further undermine the business of legitimate bookmakers,
including those who returned to the UK following the advent of
gross profits tax in 2002.
The logical way to deal with this situation
would be for those laying bets on the exchanges to be separately
identified and taxed on the profits they generate.
Failing this, we would suggest that, at the
very least, a firm of independent accountants should be commissioned
by Government with a view to finding a lasting and workable solution
to this problem before it escalates further.
Your Committee also asked about contributions
to the Gambling Industry Charitable Trust and the amount paid
by the remote gambling sector. The reality is that those of our
members who provide remote services also provide traditional face-to-face
betting services, in many cases both on and off course, and contribute
to the GICT as corporate entities. In other words, they do not
apportion part of this cost to their remote business and part
to their other betting operations.
The overall answer to your question, however,
is that in this financial year ABB members contributed £278,000
to the Trust. That this was slightly short of our target of £300,000
was attributable to the fact that the Tote's contribution was
not as generous as anticipated.
However, as Sir David Durie will no doubt confirm
when he gives evidence to the Committee on behalf of the Trust,
the ABB's largest members have already pledged in excess of £700,000
for the financial year 2004-05 and the Tote, now an Associate
member of the ABB, has also agreed to substantially increase its
contribution.
I hope this is helpful, but please do not hesitate
to let us know if we can be of further assistance to the Committee.
Tom Kelly
Chief Executive
February 2004
| 
