A New Levy Scheme in the UK

2 November 2002

In what's become a rite of passage from fall to winter, government officials and betting interests have reached an agreement on the taxation of betting in the United Kingdom.

The Department of Culture, Media and Sport announced Thursday that the Levy Board and Bookmakers' Committee have approved a scheme that will pump some £94 million into British horseracing starting in April. That amount is £6 million below the board's initial budget, but £6 million more than this year's forecast yield.

"It's a wake-up call to the racing industry to get its act together."
-Rob Hughes
UK Levy Board

Despite the reaching of an agreement, negotiations had an element of tense squabbling that has come to be a standard. The main sticking points this year concerned the position of on-course bookmakers, who were the only sector not to move on to a gross profits-based scheme for the current year, and the betting exchanges and spread betting firms, which had never previously figured in the levy system.

The deal calls for on-course operators, betting exchanges and point-to-point bookmakers, who are included for the first time, to pay more under the new terms, while conditions for the other sectors remain the same.

The main terms are:

  • Off-course betting shops will each pay 10 percent of gross profits on U.K. horseracing over £75,000 (from £150,000 this year), with a pro-rata reduction below that sum.

  • Credit, phone, Internet and interactive operators will pay 10 percent of gross profits, and spread betting firms 2 percent, as before.

  • Betting exchanges will pay 10 percent of gross profits of successful layers, with no aggregation between layers and before commission, instead of 10 percent of gross commissions.

  • On-course bookmakers will pay 10 percent of gross profits, after accounting for any losses of individual pitches, instead of a fixed fee of £132 per bookmaker.

  • Point-to-point bookmakers will pay a fixed fee of £134, for the first time.

  • In each case, only U.K. horseracing business counts for levy, which is no longer payable on foreign racing.

The deal was struck with just seven hours to spare before the midnight deadline set by the DCMS.

If the groups hadn't reached an agreement, they would have had to turn to DCMS Secretary of State Tessa Jowell to mediate the situation, which was the case last year.

The two sides still are at odds, however, over how much of the betting action should be given back to British racing interests.

The Bookmakers' Committee revealed that horse racing's share of the betting market had fallen from 63 percent to 59 percent--and to 54 percent if overseas racing was taken out of the calculation--since the start of the current levy scheme.

The BHB nominees managed to negotiate the percentage back up to a net 57 percent (62 percent if foreign racing is included), but Hughes said this was still a worrying situation.

"This is the one dark cloud that emerged through the course of the negotiations," Levy Board Chairman Rob Hughes said. "There are a number of reasons why racing's share of betting turnover, and therefore of gross profits, continues to decline, but one of the most significant is the introduction of fixed-odd machines in betting shops."

The loss of levy from foreign racing, which was negotiated when the BHB reached a deal with bookmakers on pre-race data licenses, is expected to cost racing £5 million, but will probably be offset by other terms.

"We have always said we want to pay what is fair to the industry, and if, when the details come through, it is clear that the proposal has been properly thought through, we will give the 42nd scheme our backing."
-Mark Davies

Hughes said he was pleased an agreement was reached, but added that neither side should get complacent.

"This gives the punter both more choice, in terms of betting and gaming opportunities, and better value for money," he said. "It's a wake-up call to the racing industry to get its act together. We have an ideal opportunity through the wholesale review of racing, which has been instigated by the BHB. The outcome of that review must ensure that we continue to have an attractive product to offer the punter and the wider public. It's the only sure-fire way to secure a future which is in the best interests of all the parties concerned."

While the racing sector addresses mounting threats with which it has gradually become very familiar, sports betting is dealing with the relatively new--but very serious--quandary of competing with person-to-person betting exchanges. The absence of a bookmaker (at least in the traditional sense) in person-to-person betting translates to the absence of taxes, which translates to much better prices available to customers.

Thanks to this (what bookmakers consider to be unfair) advantage, U.K bettors are quickly warming up to P2P betting, and the proof lies in the resounding success of industry leader Betfair.com, which is now matching an estimated £50 million per week.

To level the playing field, and more importantly, to recoup the tax money being lost, the Bookmakers' Committee presented the tax on gross profits, which ultimately treats the punters who lay the bets like bookmakers by requiring them to pay the 10 percent levy.

Officials with Betfair.com said they were happy an agreement was reached, but stopped short of giving it their blessing.

Betfair said its immediate concern is that the scheme is not directly linked to the gross profits of the exchange.

The company stated that the scheme contradicts the principle of a gross profits levy and potentially exposes the company to a Levy Board payment that could run at an unacceptably high percentage of its commission.

Nevertheless, Betfair said it would support a solution on the lines of the current proposal, as long as sufficient safeguards are put in place and certain definitional problems are addressed.

The company made clear its rejection of any form of double taxation, and is seeking confirmation that any registered bookmaker that uses the site is excluded from the exchange's liabilities. (A large part of Betfair's business is derived from professional bookmakers looking to balance their books.)

Mark Davies, Betfair's director of communications, said he's confident that it's possible to implement a system with which all sides are satisfied.

"We believe this could be a workable scheme, provided a few key issues can be addressed," he said. "We have always said we want to pay what is fair to the industry, and if, when the details come through, it is clear that the proposal has been properly thought through, we will give the 42nd scheme our backing."