Government to lose as bookies flee UK

Telephone and internet operations head offshore while betting shops suffer. Tax revenues could collapse, says James Moore
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The Independent Online

To look at their results from the World Cup you'd think all was rosy in the bookmakers' garden. That would be a mistaken impression. Yesterday, William Hill announced the migration of its telephone betting business to Gibraltar. The move means that just about the only remaining UK-based betting businesses are the Tote, Betfair and about 8,500 betting shops – whose number is beginning to decline.

The tax boom enjoyed by the Exchequer when the last government replaced the hated betting duty paid by punters on every bet with a gross profits tax paid by bookmakers is rapidly turning into a bust.

Gordon Brown introduced the change as Chancellor to counter the mass migration of bookmakers' telephone and internet businesses offshore as a way of being able to offer their punters tax-free betting. The deal was that the duty would be replaced by the 20 per cent gross profits tax (GPT) and bookmakers like William Hill and Ladbrokes would remain in the UK. That deal is dead.

Bookmakers say they have had no choice but to move. They argue that they are facing a squeeze from rivals who pay neither the GPT nor the 10 per cent levy on horse-racing profits that funds racing. As such, those rivals can offer better terms to punters and still beat the onshore bookies' profits.

Then there are the betting exchanges such as Betfair. People who use it to "lay" bets on horses to lose (like bookmakers) also pay no tax whatsoever. William Hill's chief executive, Ralph Topping, says enough is enough. "I wouldn't mind if Betfair was just peer-to-peer betting, but it's not," he says. "We believe there are 10 or 12 large layers taking bets, without paying any tax. So we have to do this to compete. We have no choice."

He is also furious about the industry being overseen by the Department of Culture, Media and Sport. "This is a serious industry. It employs forty to fifty thousand people and yet we get put with the Tourism minister because of the way horse-racing is funded. I've no problem with [Tourism minister] John Penrose, he's very bright. But we are a serious industry and we want to be treated as a serious industry. We tried to get [the tax issue] dealt with by the last government, but for the last two years they were just focused on survival. The problem with the new government is that I just don't think they are taking us seriously."

Hill's own figures back him. William Hill's existing telephone betting business made a loss of £1.8m in 2009 and a small operating loss is anticipated to be made in the first half of 2010. Moving into Gibraltar's low-tax jurisdiction should change that. The group will save up to £7m annually.

Mr Topping might be the most vocal exponent of this view, but he's hardly alone. Hills' great rival Ladbrokes has made a similar move.

Betfair, which declined to comment, has been vociferously lobbying against any change to its tax treatment, holding the threat of a move of its own, to Malta, in reserve. Part of the reason it has remained onshore, though, is because it helps Betfair's international ambitions. Being a UK company rather than an "offshore" operation helps a great deal when you are courting sometimes hostile international regulators whose local industries don't want you breaking their monopolies.

Which leaves the betting shops. In 2007, the then government scrapped the "demand test" that bookmakers had to pass before opening up a new shop. This held that magistrates should consider whether there would be sufficient demand in a particular area for a betting shop before allowing one to open. The rule was a boon to the existing operators in many areas because they would inevitably argue against the introduction of any competition on their patches, but it put a sharp cap on growth.

The scrapping of the rule led to predictions of a boom in betting shop numbers, with analysts excitedly talking about the prospects of 10,000 or more shops compared to the average of 8,508 that the Association of British Bookmakers (ABB) says were operating during that year.

The rash of openings never materialised. In 2009, the ABB says there were 8,531 shops operating, an increase of just 23 shops. In fact the numbers are contracting. Part of the reason is recessionary, but shops are also facing steep rises in costs from regulation, tax on what they make from fixed odds betting terminals and hikes in the fees they pay to sports for showing pictures. William Hill is now "reviewing" the future of 170 unprofitable shops.

Many will close. Is all this just bookmaker bleating though? They are, after all, starting to make good profits again. Simon French, analyst at Panmure, says: "If you're the biggest and you have 8 per cent of your shops that are unprofitable, it does demonstrate that you are facing a very difficult environment. There will always be a market for betting shops but they are competing for just part of the leisure pound and part of the gambling pound."

Perhaps, though, that difficult environment should cause the Government to pay attention. With much of the Western world facing budget crises a number of governments increasingly see gambling as one way of helping to plug the fiscal gap. There are even hopes among some online gaming companies that the US will reopen its markets if they agree to be regulated, and, crucially, taxed. There is a certain irony that while Britain's overseas partners eye a potential tax boom from gambling, its own revenues look poised to all but collapse.

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