Editorial: Smoke and Mirrors - the Betting Exchange Shell Game (Page 3)

4 October 2002
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The consistent number coming out of bookmakers is that their turnover is up about 40 percent due to the effect of betting duty reforms. (William Hill's turnover for the half year was up 48.3 percent to £1.12 billion and gross win was up by 1.3 percent to 17.5 percent, or £198.2 million. Ladbrokes' racing turnover for the half year was up 42.8 percent to £879.6 million.

Therefore, the 2002/03 total off-course stakes could be forecast (based on 2000/01 HMCE data) at £10.1 billion p.a. (for all off-course bookmakers). But, Betfair pops up with an estimate of £5.2 billion (and reputedly growing by 5 percent per week), so the 2002/03 forecast is then £15.3 billion (and a 33 percent market share for Betfair alone) or, based on Betfair's half-matched bets of £1.3 million, £11.4 billion, or an 11 percent market share. I think we have reasonably addressed the question of what turnover is, and for a betting exchange, it must be escrowed funds. That means Betfair is by far the largest wagering operator in the United Kingdom with a 33 percent turnover market share. In fact, Betfair is probably the largest account wagering operator in the world; it's just their margin is so low, it's basically the same money chasing itself around and around.


Expenditure, or punter's losses, tells a different story. Punters on Betfair are estimated to pay (on racing) about £52 million p.a. in commissions against a forecast of about £1 billion in punters losses (on racing) to bookmakers. But, this is still a 4.5 percent market share (from nothing in not much over a year).

Turnover or Profit-Based Levy/Tax?

Until recently the United Kingdom had a betting levy of 6.75 percent, a turnover tax and a horseracing levy (broadly based on a turnover variable of 1 percent to 1.5 percent, depending on a number of factors). But, the impost was so high that it was impossible to price into the betting odds, and no one wanted to pay it at the time of the bet (on which it was actually levied on). Hence, it was collected as a 9 percent deduction on winnings (higher than 7.75 percent to 8.25 percent because bookmakers pay out less winnings than turnover).

In Australia, again until recently, fixed-odds betting taxes were uniformly based on turnover, but with the introduction of the goods and services tax and the equalization of bookmaker taxation across jurisdictions, bookmakers' taxation changed to approximately 10 percent (1/11) of the gross wagering margin. However, payments to the racing industry remain at about (varying according to the state) 1 percent of turnover--approximately 20 percent of on-course bookmakers' GWM.

It is possible that profit may be minimized. A bookmaker, or an associate of the bookmaker, by establishing "Professional Punting Corp BV" (in a tax haven), which uses betting liability information supplied by the bookmaker to make reciprocal bets (as a punter), would result in the onshore operation having a reduced, or even erased, gross wagering margin (the same as an exchange bookmaker) by in effect shifting the profit/loss on each and every event to the offshore PPC BV, thereby enabling the bookmaker to avoid the GPT and betting levy.

If the issue of how betting exchanges operate is not addressed, then, in the interest of competing on a "level playing field," bookmakers may have no alternative than to use such avoidance measures to remove their two biggest costs. Alternatively they may press to be treated by HMCE and the BHB on the same basis as the exchanges.

Strike a Light...

Benchmarking of the bookmaking business has long relied on the relationship between turnover on the one hand and gross win/gross win percentage on the other.

Conventional wisdom is that an average customer will earmark a specific maximum sum he is prepared to lose. If he loses it quickly, he places fewer bets, meaning lower turnover and higher gross win percentage for the bookie. If he loses it slowly (through having winnings to reinvest), he places more bets, meaning increased turnover but lower gross win percentage.

When betting duty (GBD) and horseracing levy were calculated as a percentage of turnover (respectively before Oct. 6, 2001 and March 31, 2002), increased turnover meant decreased contribution to bookmakers' revenue/profit, that is, the statutory duty and levy got a bigger share of the available punter expenditure.

Now that duty and levy are functions of gross win, however, and punters no longer see deductions, increased turnover lessens significantly the decrease in contribution to profit. In fact, particularly driven by the effective cut in duty/levy from 9 percent of turnover to approximately 3.4 percent (25 percent of 13.5 percent), we have seen a surge in turnover as the differential has been reinvested and commensurate gains in bookmakers' revenue/profit.

The problem for bookmakers--government (HMCE & DCMS) and Racing/BHB--is that betting exchanges have achieved higher turnover and lower gross win than any bookmaker can hope to achieve. This means that applying to the exchanges the same gross win basis of taxation and levy liability as applies to bookies gives the exchanges a huge commercial advantage by demanding from them a lesser level of tax and levy obligations.

If the exchanges and those using them (and this is a critical point as the users are shielded by the exchange) are to meet their economically fair share of tax and levy obligations, the basis on which they are assessed needs to be articulated in terms other than those of bookmakers. The exchanges are not bookmaking businesses, but they do enable their bookmaking (and this includes professional punters who are no more than reverse bookmakers) customer base to avoid tax and levy.

The bookmakers have proposed (as an answer to their perceived issues) that layers on exchanges be required to secure bookmaking licenses and report themselves to HMCE, but that looks unwieldy and unworkable with the genie already out of the bottle, not to mention that that their aren't any "layers" as such.

The answer perhaps lies in using the deduction mechanism for exchanges and applying through that mechanism a properly calculated turnover-based basis of assessment to tax and levy.

In Bet Unfair!, I suggested a composite (tax and levy) 3.4 percent turnover tax on exchange turnover (escrowed funds). It is now clear that this would be a multiple of current commissions (about 1 percent) and would equate to about 12.5 percent of exchange users' net winnings (on current numbers). This is a reasonable comparative compromise on the 25 percent fee paid by bookmakers because the exchange users would not have the advantage of averaging their wins/losses over the course of a month, and could never be granted such a luxury, as they are not operating a business.

Importantly, such an approach a 3.4% turnover tax is not an unfair impost on ordinary punters using betting exchanges, but it would have a significant effect on professionals and/or unlicensed/illicit bookmakers who are currently outside of the duty and levy net. Therefore, if they were to continue to operate within the exchange platforms, regulators (both DCMS and HMCE) would have some confidence that the illicit bookmakers were at least competing with legal bookmakers under the same government-imposed economic conditions.

It is critical though to understand that a turnover tax would have an effect on the short-odds-on punters. For example, a punter laying 5/1 about a £10 wager is actually having a £50 bet to win £10, but his turnover tax cost would be £1.60 or 16 percent of his winnings, whereas the backer would have paid £0.32 or 0.64 percent of his winnings. Therefore, a turnover tax would force punters to be more circumspect when backing odds-on outcomes.

Betting exchanges must have a critical mass to generate sufficient liquidity. Without doubt the distortion of the market in the exchanges favor has helped them achieve that quickly by their facilitation of otherwise illegal bookmaking. While proper assessment of tax and levy will no doubt deprive the exchanges of some liquidity and result in both less compression of prices overall (particularly in horseracing events) and less stability of those prices, it is unlikely that it would be the death knell of exchanges.

The challenge for government and the betting public is determining what is fair betting.

The views expressed in this editorial do not necessarily reflect the views of Interactive Gaming News or the views of the Australian Bookmakers' Association, which has not examined the U.K. issues in any detail.

Tim Ryan is a graduate of Agricultural Science, though he is probably best described as an innovator. He has worked in consumer online information and transaction systems since their inception and was the Australian pioneer of television data broadcast and is still the Consultant General Manager of the Seven Network’s teletext and datacast services – the principal provider of real time wagering information in Australia. Tim was an innovator of integrated wagering information and transaction systems. He has also consulted to a number of wagering system developers on the internationalisation of their systems. Tim became a NSW licensed bookmaker early in 2000 for regulatory reasons associated with the development of wagering systems. Despite not being a ‘working’ bookmaker Tim was appointed to the Australian Registered Bookmakers Advisory Council, Australia’s peak body representing all its 800 bookmakers. In this capacity he was instrumental in lobbying the independent Senators and the Government to ensure the exclusion of wagering from the Interactive Gambling Act.