When the U.K. Treasury announces its new budget on Wednesday, Popular P2P betting exchange Betfair.com could learn whether its customers will be subjected to a new tax.
Betfair, a U.K.-based operation, is currently subject to a gross profit tax, but that could change. To what degree is uncertain.
"The bookies want our punters to be taxed because they think it will make us less competitive, but they sham it up with an argument about a 'level playing field,' which is utter nonsense."
- Mark Davies
The Treasury was the target of an intensive lobbying campaign from the England's high street bookmakers, who argue that Betfair has a competitive advantage and that its customers should be paying a tax because they act as bookmakers by setting their own prices.
Betfair handles more than £2.5 billion in turnover a year, and although its system was scoffed at during its infancy, traditional bookmakers are doing whatever they can to keep their competition at bay.
Leading British bookmakers William Hill and Ladbrokes have led the charge against Betfair, arguing to the government that unlicensed bookmakers are using the site to avoid paying a tax. They suggest that a majority of Betfair's racing business comes from commercial bookmakers who see the site as an easy way for them to level their books.
Betfair generates its profits by charging a small commission to its users. But any on-course bookmaker who chooses to use the site is exempt from paying tax.
Like Ladbrokes and William Hill, Betfair pays a 15 percent tax on gross profits, as per a policy introduced by the government in 2001.
To counteract what high street shops call a loophole in the current rules, the Treasury is considering a range of options, including the introduction of a gross profits tax on the winnings of punters who use Betfair to lay bets.
A source from Ladbrokes told the Financial Times that his company was suffering due to the rise of Betfair.
"At the moment, betting exchanges have a fiscal advantage, which means they can offer better odds, which is eroding bookmakers' margins," he said. "So the Treasury is losing money on two fronts. It's important that there is a level playing field because at the moment the Treasury is losing millions of pounds in lost revenue because the exchanges are not paying their due."
Mark Davies, communications director of Betfair, said the same issue was raised two years ago when the government ultimately decided to apply the gross profit tax to Betfair instead of taxing the individual bettor.
"There are three ways we can be taxed, and to argue that the current manner is a loophole is daft," Davies said. "You don't get taxed if you bet with William Hill, so why is it a loophole for you not to be taxed if you bet with us? It's being spun as a loophole by the big players, but basically they want to characterize you as a bookmaker when you are not; you are simply a punter."
For Davies, the proper equation for taxing Betfair is simple.
"We believe that the right way to tax us would be on our commission, since it is a gross profit tax and that is how we make our profit," he said. "The bookies want our punters to be taxed because they think it will make us less competitive, but they sham it up with an argument about a 'level playing field,' which is utter nonsense."
Davies feels Betfair would be held to a double standard under the proposed tax on punters, but not other bookmakers.
"The level playing field they want would allow you to bet with William Hill that Manchester United won't win the premiership, but to express that view on Betfair you would be taxed, and require a license anyway," he said.
At the heart of the issue, Davies said, is what makes Betfair and other betting exchanges unique: Punters can be layers, or bet against something happening, for a much better price than what they'd get using traditional bookmakers.
"You do so at a much more competitive price than they offer because you are expressing your one opinion and not trying to lay a whole book and make money off someone," Davies said.
Davies remains hopeful that Betfair will be able to continue operating in Britain instead of offshore, where it would avoid taxes totally. He added that subjecting Betfair's customers to a bookmaking tax would be unfair and would increase the system's vulnerability to corruption.
"If they did adopt that system, it would be discrimination against our customers for the fact that they are our customers," he said, "as well as exposing us to massive volatility and forcing us to pay on the basis of something over which we have no control at all: how profitable our layers are."