MEMORANDUM FROM THE ECONOMIC SECRETARY TO THE
TREASURY ON THE GAMBLING BILL AND TAXATION
FROM: Economic Secretary
DATE: 8th January 2004
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had become unwieldy, outdated, and overly complex both to comply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
(e.g. 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% was introduced on 6th 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
2000 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% duty
on pool betting stakes was replaced by a 15% 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% 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% 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 6th 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 (e.g. 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% - 40%, 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 e.g. 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.
GAMBLING DUTIES: CURRENT STRUCTURES, RATES AND
REVENUES
Structure and Rates
| Duty |
Rate | Basis
| Other |
| Lottery | 12% | Stakes
| 28% to good causes |
| General Betting | 15% |
Gross Profits | Lower rates for spread betting firms (3% financial / 10% sports)
|
| AMLD | £250 - £1,860 per machine p/a
| Licence fee | VAT on gross profits
|
| Gaming | 2.5% - 40% | Gross Profit Bands
| VAT on participation fees in card rooms. |
| Bingo Duty (from 27 October 2003) | 15%
| Gross profits | VAT on participation fees
|
| Pool Betting | 15% | Gross Profits
| 4% of major promoters' gross profits to sports and arts until March 04.
|
Revenue Yield (£m)
| Duty | 1998 / 99
| 1999-2000 | 2000 - 01
| 2001 - 02 | 2002 - 03
|
| Lottery[1]
| 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)
|
| Gaming [3]
| 91 | 107 | 129
| 129 | 151 |
| Bingo[4]
| 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. Back
2
Not all the amusement machines liable to AMLD are gambling products
- for instance pinball and some quiz machines Back
3
Applies to casino table gaming. Casino jackpot machines are liable
to AMLD. Back
4
Applies to commercial bingo clubs. Back
| 
