Supplementary memorandum from Betfair
(DGB 180)
BACKGROUND
On 20 March 2004, the Financial Times carried
an article which included the following paragraphs:
"For traditional bookmakers, it works
like this. A punter loses a £100 bet on a horse, and the
bookmaker thus earns £100. Out of this, the bookmaker pays
15% in betting tax to the Treasury and 10% to the levy board.
From every £100 bet, the industry thus receives £10
and the exchequer £15.
But on a betting exchange, it works differently
because the exchange's earnings are derived not from laying bets
but from commissions paid by all winning punters. If you play
bookmaker by laying a £100 bet on a betting exchange and
you win, you owe only your commission to the exchange and it is
on the commission—not the stake—that the levy and
tax is paid. Exchange commissions vary between 2% or less, for
big gamblers, and 5%. So assuming a 3% average commission, on
this £100 bet, the Treasury gets 45p and the levy board 30p."
This is wholly misleading. Suggesting that exchanges
"only pay on their commission" is the same as saying
"bookmakers only pay on their theoretical margin". The
fact is that we both pay tax on our profits, and we both seek
to maximise our profit.
HOW TAX
IS PAID
BY BOOKMAKERS
AND EXCHANGES
We make our money by charging the winner a percentage
of his winnings; bookmakers make their money by paying to the
winner less than they take from the loser.
It is therefore hugely misleading to suggest
that a bookmaker will pay £15 when a customer loses £100,
for the following reason: the customer who loses £100 does
not do so in isolation. If he did, bookmaking would be the fastest
way to becoming a millionaire. The reality is that when one customer
loses £100 to the bookmaker, another one wins £85 from
the bookmaker, which the bookmaker can offset before he pays any
tax. The differential between the two is therefore how the bookmaker
makes his money. He does not make it on the £100.
To put it another way: assume, instead of there
being the single customer in the world painted by the bookmakers,
that there are two customers in the world. One wins £100,
and the other loses £100. The bookmaker makes no money, because
he pays out as much as he takes. He therefore pays no tax.
In the same situation, the betting exchange
takes a 5% commission from the winner, and takes nothing from
the loser. He therefore makes £5, and pays 15% of that in
tax. The exchange, in this scenario, pays more than the bookmaker.
Again, the reality of the world is that there
is more than one customer, and more than two customers. And the
way we make money is to charge a commission of 5% to the winner;
and the way that a bookmaker makes money is to pay around 15%
less to the winner than he takes in total from the losers. We
both pay on the gross profit generated, which is the same as the
gross amount lost by punters.
Although the bookmakers will tell you that they
always generate more, this is clearly not the case. A real-life
example of this is the 2003 Cheltenham Festival, where the bookmaking
industry as a whole lost an estimated £50 million. As a result,
the bookmaking industry paid no tax or levy from business over
the Cheltenham Festival, and the next £50 million of profit
will have generated no tax or levy either. Conversely, betting
exchanges will have contributed significant tax and levy during
the same period, on account of the customers who won money. Indeed,
every event on a betting exchange involves winners and losers.
The winners will always generate commission, and therefore tax
and levy. The same is not true of the traditional bookmakers,
who, if there are more winners than losers, generate no tax or
levy—and can carry their losses forward to the next profitable
period.
Our margin is lower than their margin, because
it is a risk-free margin, whereas the traditional bookmaking industry
makes its money by a combination of the theoretical margin and
its risk management. As a consequence, our turnover is higher.
Empirical studies have consistently shown gambling to be a price-elastic
product, as does our own experience of cutting our commission.
Therefore, as a betting operator's margin reduces, turnover increases
such that the betting operator's overall take (ie what his punters
lose to him over the same period) remains at least as great. The
fact is that our total gross profit (ie total takings from punters)
and William Hill's gross profit will be equal in ratio to our
respective shares of the market and will have nothing to do with
the different margins at which we choose to operate. And we each
pay the same percentage of our total take-out to the Treasury,
and to the horseracing levy.
FOREIGN CLIENTS
One further point arose from the article which
may be of interest to you. William Hill's David Hood suggested
that you cannot claim that a Far Eastern punter who bets £1
million is a recreational punter.
If a professional punter uses William Hill,
he is not taxed or regulated, and this has been of no concern
to William Hill over the course of many years. Even today, if
the same punter bet in large size on sporting head-to-heads with
William Hill—therefore laying whichever player or team he
does not back, and placing exactly the same bets as he does on
an exchange—would the bookmakers still believe that he should
be made liable for tax, and require a licence?
If they would, in spite of never having been
concerned about the issue when they had an effective monopoly
on the punter, what are the practicalities of licensing or taxing
an individual who lives in the Far East? Indeed, where is the
UK government's jurisdiction over that person?
Preventing an individual abroad from betting
with a UK exchange merely makes him bet with a foreign one. The
person's presence on the exchange currently brings tax advantages
to the UK, since every time he wins, he pays a commission to the
operator. If he bets with a foreign operation, that tax-take to
the UK will be lost—for no regulatory benefit whatsoever.
March 2004
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