Odds are against Betfair as Cyprus plans to ban exchanges

The word controversial is never far away from Betfair, the online betting exchange which allows users to act as bookies by "laying" horses to lose as well as backing them to win. It is the latter which causes a fuss, most recently in Cyprus where the Government has included provisions in a crackdown on online gambling that appear aimed directly at the company.

Cypriots are keen users and Betfair's admission of a problem with the proposed new laws caused its shares to wobble yesterday.

The move appears motivated by tax. With an economy from which the term "bailout" is never far away, that's no surprise. Most online gaming companies are based offshore to avoid ponying up. Cyprus (and many others) would like to change that.

Governments usually tax gambling by imposing levies on companies which take (or lay) bets to profit from losers rather than on individuals who like to hunt winners.

That's much harder to do with an exchange, where punters can sit on either side of the wager. Cyprus's solution to this conundrum is to ban exchanges and Betfair has countered with the threat of an EU challenge.

Working out the odds on the winner is tricky but the company should have a care. Let's say it wins. What's to stop the Cypriots saying: "Fine. We'll tweak the rule. Anyone who lays a horse to lose in our country pays a tax. And you, Betfair, are responsible for collecting it." That could cause the company all sorts of problems. And not only in Cyprus.

Gambling in this country is taxed through a 15 per cent levy on bookies' gross profits. They have complained this puts them at a disadvantage to punters who "lay" bets on Betfair whom they feel should cough up a similar amount.

William Hill has made this case at the High Court and a decision is expected soon, but even if the case fails, under existing law that can always be changed, and rather easily if Cyprus – pushed by pressure from Betfair – comes up with something workable.

When it paid the gross profits tax, Betfair could argue its punters should be exempt. Since it moved offshore to duck the tax, however, that case is much harder to make.

The online gambling firm's admission of a problem with the proposed new laws caused its shares to wobble