High 'point of consumption' tax on online gambling could encourage black market betting, say MPs

Out-Law News | 03 May 2013 | 4:32 pm | 2 min. read

The Government must not levy too high a rate of tax on online gambling to avoid encouraging 'black market' operations, a committee of MPs has said.

In a report in which it scrutinised draft new gambling licensing laws (86-page / 796KB PDF) proposed by the Government, the Culture, Media and Sport Committee said that it backs plans to regulate UK gambling on the basis of where bets are placed. However, it warned that placing too high a tax on the activities could bolster illegal online markets.

"We note that the Government’s prime justification for moving to a system of licensing operations on the basis of ‘point of consumption’ (POC) is that the existing regulatory system has significant weaknesses in areas such as transparency, consistency and the provision of information," the Committee said in its report. "The Government has stated that the ability to bring all operators serving UK consumers within the tax net is a consequence, but not the prime motivation, of the legislation."

"Whether or not this is the case, we regard it as a legitimate and desirable outcome of the change in the licensing regime that in future remote gambling companies doing business in the UK should be subject to the same taxation requirements, whether they are based onshore or offshore. However, in setting a rate of tax, the Treasury should bear in mind the need to avoid setting it at so high a level that companies and their customers are driven into the black market," it said.

Many high street bookmakers have moved their online operations abroad in order to avoid being liable for a tax on profits earned in Great Britain. UK-based operators are currently required to pay a 15% tax based on gross profits on bets, and separately must also pay a levy on gross profits taken on horse racing bets.

The Remote Gambling Association is keen that the POC tax rate is set "around 5%", the Committee said. It admitted that UK bookmakers had moved their online operations to 'white listed' jurisdictions in order to "avoid paying the UK’s tax rate", the report said. A William Hill-commissioned study published last year projected that a 10% POC tax rate on remote gambling could result in up to 27% of online consumer bets being placed in unregulated markets unless effective enforcement measures were found to restrict the growth of that market.

Under the existing Gambling Act, British-based betting firms are required to hold a licence in order to operate. There are a number of conditions associated with obtaining a licence which operators must abide by, including that they promote socially-responsible gambling. Foreign companies based abroad are allowed to operate in Great Britain if they hold a gambling license awarded in certain 'white-listed' jurisdictions.

The Committee said that overseas-based remote gambling operators had generally opposed the Government's plans for POC regulation, which are set out in the draft Gambling (Licensing & Advertising) Bill that the Department for Culture, Media and Sport published in December last year.

Those operators have claimed that the plans are "unnecessary for consumer protection, might drive consumers to cheaper unlicensed operators and [are] principally intended to bring overseas operators within the UK’s tax regime", the Committee's report said. However, the Government has insisted that bringing the companies within "the tax net" was "not the prime motivation" for its proposals.

The Committee said that the Government had said it is confident it would be able to prove that the POC-regulation proposals are compatible with EU in the event that a "disgruntled remote gambling operator or association" challenged the plans. Some firms have claimed that the licensing plans are designed for revenue-raising and would restrict trade without resolving any issues relating to consumer harm, according to the Committee's report.

Previously, Hugh Robertson, the Minister for sport and tourism, said that the POC-regulation proposals would "bridge a regulatory gap" that currently exists in consumer protection and anti-corruption efforts.

In its report the Committee said it welcomed news that remote gambling operators would display a logo on their websites, such as a kitemark, to signify that they were "holders of Gambling Commission licenses" under the proposed new framework. The Committee previously suggested that the regulator introduce a kite-mark system for websites in a report last year.