A Pivotal Time for Betfair

18 October 2005

Key policy decisions soon to come in Europe and Australia will have a major impact on the future for British betting exchange Betfair. Perhaps the single most important event on the company's radar screen will occur at home, where it is waiting to learn whether the U.K. Treasury will enact a higher tax rate on betting exchanges (a decision that could be revealed as early as November). Meanwhile, negotiations to become a fully-licensed operator in Tasmania continue beyond the government's original deadline. Premier Paul Lennon says that a definitive decision will be made by Dec. 1 so that the necessary regulations can be pushed through the legislature before the close of the session. And amid all of this, the company has opted to postpone its planned float--a decision followed by the resignation of its CEO.

The Home Front

Betting exchanges in England since 2003 have paid a 15 percent gross profit tax on the commission they receive from punters, and Betfair charges its customers a commission only on their net winnings. Bookmakers in Britain, who pay a 15 percent tax on their gross profits, have always argued that the current tax regime benefits Betfair in an unfair way. One of the main complaints is that exchange punters who lay bets should be required to pay a 15 percent tax on their profits, just like the bookmakers do. Instead, punters who successfully lay bets pay only a small commission to Betfair, which then contributes 15 percent of that commission as tax.

When Chancellor of the Exchequer Gordon Brown in March 2004 proposed his annual budget to the British House of Commons, he stated that he favored imposing a tax on exchange layers to put them more inline with bookmakers. He also revealed that Customs and Excise would conduct a review of the tax rate on exchanges, but he gave no timetable for its completion.

Parliament's Joint Scrutiny Committee on the Draft Gambling Bill suggested in April 2004 that the tax regime for betting exchanges be changed. The committee stated that professional punters who bet heavily and frequently on the exchanges should be identified, registered and made to pay a levy to sports in addition to the commission paid to the betting exchange. The final version of the U.K. Gambling Bill (passed in April 2005) does not, however, address these so-called non-recreational punters.

The betting exchange tax regime came under fire again in January 2005 when the National Audit Office released its report on gambling duties, which stated, "New forms of gambling activity since 2000 pose risks to revenue. . . . Betting exchanges pose new risks because of the way they pay duty on commission." The Observer shortly thereafter published an article in which an unidentified inside source stated that the Treasury would change the tax regime on betting exchanges in matter of months as a result of the audit report.

Despite the grievances of bookmakers and the suggestions of the Chancellor Brown, the Joint Scrutiny Committee and the National Audit Office, altering the tax regime for betting exchanges--specifically Betfair--may not be the wisest move in taking the United Kingdom forward as the world's premier gambling jurisdiction. Betfair in May 2005 secured a license in Malta allowing it to operating its new poker exchange product, which it launched from the island last week. There is much speculation that if the U.K. Treasury changes the tax regime for betting exchanges, then Betfair will move all of its servers to Malta, where it would be subject to a much more favorable tax regime.

The chancellor could reveal his plan for betting exchange tax as early as next month, and if the news is not to Betfair's liking, it could be ready to move within a matter of months, especially considering that Malta is changing its remote gambling regulations to eliminate the requirement of different types of licenses for different types of games.

The Treasury must consider the size and potential of Betfair, along with its ability to easily relocate, in its approach to taxing exchanges. The innovative company, which has a grip on an estimated 90 percent of the world's betting exchange market, reported that as of April 2005 it had over 95,000 active monthly users who placed more than 3 million bets each day. Revenue for the year ended April 2005 had climbed 61 percent to £107.1 million compared to the previous year, while operating profit rose 87 percent to £22.3 million.

A Postponed Float

Betfair was to float on the London Stock Exchange in January 2006 with an estimated capitalization of between £700 million and £1 billion, but the plan was postponed at the advice of its financial advisors, Goldman Sachs and Morgan Stanley. Analysts say the decision was due to the uncertainty of future U.K. tax policy as well as the recent decline of investor confidence in gambling stocks.

The delay could also give some credence to speculation that Betfair may even be positioning itself to be acquired--a theory fed by the buzz in recent weeks that Gibraltar-based Internet poker giant PartyGaming could be courting the company.

At any rate, not everyone at Betfair was keen to delay the float, and the company's CEO, Stephen Hill, resigned from his position immediately following the decision. Hill had served as CEO of Betfair since June 2003.


In Australia, meanwhile, the decision on whether Tasmania will license and regulate Betfair has been postponed twice. Premier Paul Lennon was expected to issue his government's decision sometime around Sept. 20, but as that date grew close, Lennon stated that the deadline should be pushed back to October 18 (today) so that discussions among Betfair, the state government and the state's racing industry could continue. Now Lennon says the decision will come by Dec. 1, a deadline that should allow enough time for the state's legislature to work through the necessary regulations.

A recent development that could affect the decision process is a multi-million-dollar commercial offer from Racing Victoria that would help Tasmanian racing by increasing prize money, adding races and eliminating nomination fees. When added to the AU$3.4 million reduction in settlement fees given to Tote Tasmania, the total value of the package offered by Victoria Racing is more than $6 million a year. The offer is thought to be extremely competitive to what Betfair could offer, and most racing officials in Tasmania, still wary of the prospect of laying horses to bet, are thought to favor the offer from Victoria over licensing Betfair.

Bradley Vallerius

Articles by Bradley P. Vallerius, JD manages For the Bettor Good, a comprehensive resource for information related to Internet gaming policy in the U.S. federal and state governments. For the Bettor Good provides official government documents, jurisdiction updates, policy analysis, and many other helpful research materials. Bradley has been researching and writing about the business and law of internet gaming since 2003. His work has covered all aspects of the industry, including technology, finance, advertising, taxation, poker, betting exchanges, and laws and regulations around the world.

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