UK Gambling Industry - Will the Budget attract the Gaming Giants to the UK
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Originally Published 5th May 2007
From 1 September 2007 the Gambling Act 2005 will be fully effective. The
March Budget made a surprise announcement of a tax break for on-line gaming
The taxation of the UK gambling industry was brought to the forefront of the
financial world in 2006 by the US crackdown that so adversely affected internet
gambling in the UK. Further attention has been brought by the European Union
efforts to abolish Gibraltar’s exempt company tax regime. Most on-line gambling
companies are based in the offshore tax haven of Gibraltar. 2006 has seen a
flurry of VAT business briefs, a tax case and attention from the European
Union. Is there any other industry in the UK that received so much “tax”
attention in just one year? Perhaps the size, growth and continual change of
this industry dictate such attention.
The US congress passed the Unlawful Internet Gambling Enforcement Act in
September. This US legislation apparently wiped £3.7bn off the value of a
market previously worth £6.5bn in a single day. PartyGaming, which had
generated 75% of its revenues from the US, dropped out of the FTSE 100.
The low tax jurisdiction of Gibraltar
The December 2006 Pre-Budget Report did not address the issue of the
apparently high rate of UK Corporation tax of 30%. However, there was a
surprise announcement in the Budget of a 15% tax rate for on-line gaming
companies. It is considered that the Government will fail to attract the gaming
giants to the UK. It is also considered that a 15% remote gaming levy on
worldwide income along with corporation tax of 28% is unlikely to lead to the
relocation of many on-line gaming companies to the UK from other jurisdictions
which already have regulatory and licensing regimes in place.
As on-line gaming companies are all “dotcom” businesses, it has been easy for
them to establish headquarters in the low tax jurisdiction of Gibraltar and
other low tax jurisdictions such as Antigua and Alderney. One of the main
reasons that the on-line gambling industry suits Gibraltar is because there is a
small staff and premises cost which is one of main basis of the advantage of the
Gibraltar tax system. This has provided the on-line companies with a significant
edge on other sectors because they have not had to pay the UK corporation tax
rate of 30%. But these significant tax benefits have been under threat from the
European Union, which has been working to abolish Gibraltar’s exempt company tax
In April 2004 the European Commission (EC) said that tax rules in Gibraltar
provided companies domiciled there with an unfair advantage over other Countries
in the Union.
The EC said this amounted to ‘regional selectivity’, and also took issue with
the fact that taxes in Gibraltar were based upon payroll and the occupation of
business premises, which meant that businesses would be unlikely to pay any
corporation tax liability.
The EC said that by 2010 Gibraltar would have to abolish its exempt company
regime and implement a replacement tax regime instead. This raised the
possibility that on-line gaming groups based in Gibraltar could find themselves
paying corporation tax of 30%. A recent European Court ruling, however, has
indicated that the advantages will continue. Gibraltar’s 1969 constitution
provides the territory with fiscal autonomy and the region should be able to
continue providing companies with an attractive tax regime. Those involved with
the on-line companies anticipate that when Gibraltar’s tax exempt scheme is
phased out by 2010 the replacement will be low cost.
What of the UK tax position of the gambler?
Essentially betting is tax free – the professional gambler is outside the
scope of tax.
The current case law is set out in Graham v Green (1925) 9 TC 309, a case
which concerned a man whose sole means of livelihood came from betting on horses
at starting prices, Rowlatt J says at 313:
“Now we come to betting, pure and simple…It has been settled that a bookmaker
carries on a taxable vocation. What is the bookmaker’s system? He knows that
there are great many people who are willing to back horses and that they will
back horses with anyone who holds himself out to give reasonable odds as a
bookmaker. By calculating the odds in the case of various horses over a long
period of time and quoting them so that on the whole the aggregate odds are in
his favour, he makes a profit. That seems to me to be organising an effort in
the same way that a person organises an effort if he sets out to buy himself
things with a view to secure a profit by the difference in what I may call their
capital value in individual cases.
“Now we come to the other side, the man who bets with the bookmaker, and that
is this case. These are mere bets. Each time he puts on his money, at whatever
may be the starting price. I do not think he could be said to organise his
effort in the same way as the bookmaker organises his. I do not think the
subject matter from his point of view is susceptible of it. In effect all he is
doing is just what a man does who is a skilful player at cards, who plays every
day. He plays today and he plays tomorrow and he plays the next day and he is
skilful on each of the three days, more skilful on the whole than the people
with whom he plays, and he wins. But I do not think that you can find, in his
case, any conception arising in which his individual operations can be said to
be merged in a way that particular operations are merged in the conception of a
trade. I think all you can say of that man…is that he is addicted to betting.
There is no tax on a habit. I do not think ‘habitual’ or even ‘systematic’
fully describes what is essential in the phrase ‘trade, adventure, profession or
The principle in this case was followed in Down v Compston (1937) 2 All ER
475, (1937) 21 TC 60 where a professional golfer attached to a golf club
habitually engaged in private games of golf for varying amounts and won
substantial amounts. He was found not to be liable under Case 2 National
Insurance on the basis that the bets did not arise from the playing services and
that there was no organisation to support the view that he was carrying on the
business of betting on the games of golf. It is possible however; that the
courts might take a different view if this came to court today.
But these cases were 1925 and 1937 do these principles still apply to the
professional “on-line punter” of today? Yes is the simple answer. This has
caused some grief for the profession bookmaker who is fully taxable. The on-line
gambler can be more of a statistician – gambling is a fact based science.
Betting by professional bookmakers is assessable to tax even if carried on in
an unlawful way (Southern v AB (1993) 18 TC 59). Private betting is not
assessable, however habitual. Its profits, if any, are also exempt from CGT
(Capital Gains Tax) (TCGA 1992, s 51(1)). Receipts from newspaper articles
based on a betting system were, however, held to be assessable to income tax in
Graham v Arnott (1941) 24 TC 157. This is the profession of a journalist not
the profession of a bookmaker.
Why is gambling tax free?
The simple answer is that HMRC could not cope with the tax claim for gambling
The sporting world involves a large amount of gambling at all levels. In
practice, if the HMRC tried to assess the ‘winners’ to tax there would be a
deluge of tax loss claims. The cautious tax practitioner should advise clients
to keep a record of their winnings in case evidence is required at a later
stage. The HMRC always need to verify sources of income and windfalls in an
enquiry situation so it is important to keep records to avoid any future
problems over the identification of any capital introduced in to a business.
The money laundering provisions have a large potential impact for tax advisers,
their clients and illustrate the need for information of gambling activities to
be provided by the taxpayer to the tax adviser even it is only as information
held on the file.
The UK bookmaker is taxable
Whilst the professional gambler escapes the tax “net” the UK bookmaking
business is assessable to income and corporation tax. If it is possible to feel
sorry for a UK bookmaker perhaps it is the fact that the on-line industry has
managed to escape corporation tax.
A professional bookmaker systematically attended racecourses for the purpose
of carrying on that activity; although he could not legally recover amounts due
to him, he was held to be carrying on a vocation. It has also been held that
betting by professional bookmakers is assessable even if it is carried on in an
unlawful way. See Southern v AB (1933) 18 TC 59 where it was held that there is
no tax on a habit. It has been considered that the words ‘habitual’ or even
‘systematic’ do not fully describe what is a trade, adventure or professional
What of the new breed of exchange pro-punters?
So is an on-line gambler still just operating a system by habit or are they
The exchanges have produced a large number of pro-punters who approach their
work on a scientific well-researched basis and the profit is tax free. It is
certainly good news for professional exchange players that there will be no
distinction between recreation and non-recreational layers. So how does the
pro-punter deal with the issues of compliance?
If a pro-punter has a small amount of self-employed earnings they can use the
tax-free personal allowance for income tax purposes and pay the self-employed
NIC AND claim business expenses AND be on the tax return “system”. Pro-punter
results can be included in the additional information section of the Tax Return
(the white box). A mix of pro-punter profits and some earnings or self-employed
earnings is very efficient.
Gambling on-line has given rise to a new breed of statisticians with clear
use of available data. There is a different TYPE of pro-punter than before the
birth of the exchanges as the earlier tax cases explained. Sometimes the cool
headed calculation of statistics is now the order of the day as opposed to the
possible appreciation of the racehorse or the unsupported “hot tip” or
“whisper”. (The placing of a bet is exempt for VAT but this is not the case
with gaming machines).
Gaming machines – failure to license
The Gambling Act 2005 sets out that after 1 September 2005, pubs and other
alcohol-licensed premises will have an automatic entitlement to one or two
Gaming Machines. Licensees with a Section 34 Permit, who wish to operate no
more than one or two machines, must write to the local licensing authority prior
to the expiry of their Section 34 Permit notifying the authority of their
intention to have one or two Gaming Machines available on the licensed premises.
Those Licensees who already have more than two Gaming Machines on their
premises or, who wish in the future, to have more than two machines must apply
for a Licensed Premises Gaming Machine Permit.
The latter part of 2006 saw a plethora of VAT business briefs trying to
regularise the VAT position in gaming machines. The placing of a bet, the act of
gambling is an exempt supply for VAT but the supply of a gaming machine is
subject to a charge for output VAT.
Business brief 15/06 dated 27 September 2006 sets out the position on VAT and
Gaming Machines and the failure to license.
HMRC are concerned that, despite their statement in December 2005 that for
the purpose of VAT with regard to gaming machines, it was irrelevant where the
element of chance in the game is provided, some businesses failed to license or
account for VAT on these machines or have submitted claims requesting repayment
of VAT that had been paid.
HMRC says that as VAT was correctly payable on these machines, repayments
will not be made and where tax has been under declared, assessments will be
issued. If a business considers it has been misdirected, it should contact the
VAT office. The key here is location of the machine – It does not matter where
the game of chance is located. Gaming machines in clubs, bars, pubs and
bookmakers will have to be considered as to the charge of output VAT and the
potential loss of margin and profits.
The Pinball Wizards
The flow of business briefs explaining VAT and gaming machines/games of
chance etc continue at a pace. Business brief 16/06 dated 12 October 2006 sets
out the following:
Two new Treasury Orders have been laid before Parliament that came into
effect on 1 November 2006. The new Orders continue to update VAT law in light
of the Gambling Act and will:
- Remove the separate definition of ‘gaming machine’ from VATA 1994 , Sch 9
Group 4, replacing it by a cross reference to the identical definition in VATA
1994, s 23.
- Provide a new definition of ‘game of chance’ in Group 4 and s 23,
replacing the cross reference to the Gaming Act 1968 definition.
- Ensure that the definition of ‘game of chance’ is the same across the UK
for both Group 4 and s 23.
- Restore the application of VAT to pinball machines.
- Ensure that any game of chance which is not played for a prize does not
fall within the exemption.
Bookmakers, gaming machines and specialist TV racing
There was some minor VAT relief for the bookmaker in 2006.
Business brief 17/06 dated 19 October 2006, again concentrated on the
gambling industry and the complexity of VAT. This followed the result in the
tribunal decision in Town and Country Factors (19616). Gambling/betting is an
exempt supply for VAT purposes. Bookmakers who also supply gaming machines and
refreshments are making a taxable supply. The company argued that VAT incurred
on specialist TV facilities and Sky Sports was partly recoverable because they
had a direct and immediate link with taxable supplies of gaming machines and
refreshments, as well as exempt supplies of betting. HMRC’s view was that the
costs related wholly to exempt supplies so that no VAT was recoverable.
The tribunal supported the company, finding that VAT incurred on specialist
racing TV was residual because the company added content to the broadcasts
advertising their taxable services and because TV attracts customers in to shops
to play gaming machines. Bookmakers may wish to claim input tax which was
incorrectly treated as exempt. HMRC say that they must use the partial
exemption method applicable to each accounting period unless there are
exceptional circumstances as to why an alternative method is needed.
Gaming Machines and Fiscal Neutrality
Business Brief 20/2006, dated 9 November 2006, notes that claims for
repayments of VAT on gaming machine takings have been received, following the
decision of the European Court of Justice in Linneweber (Case C453/02, available
for downloading from www.curia.eu). In this
case, the Court held that the German Government had breached the principle of
fiscal neutrality by taxing some gaming machines, but exempting others,
depending on the type of premises in which they were installed. The Brief
explains why HMRC considers a situation parallel to Linneweber is very unlikely
to arise under United Kingdom law and sets out what traders would have to prove
to demonstrate a breach of fiscal neutrality.
As HMRC do not accept that the tax treatment of gaming machines was contrary
to EC law, claims will only be considered if they are supported by evidence
- The machines in question are identical or substantially the same as those
that they are being compared with;
- These machines are treated differently for VAT purposes; and
- This has caused distortion of competition for the taxpayer’s business.
HMRC say that they will reject claims received without this evidence. They
advise businesses that have adjusted their VAT returns because of the Linneweber
decision to reconsider these adjustments as they will be scrutinised and
assessments made where necessary with interest and penalties added as
Definition of a bet – Accepting a bet is not a betting transaction
The UK gambling industry has both a complex structure and infrastructure to
cope with demands of the clients and the need for traditional and on-line
markets to case.
The case of United Utilities v CCE (Case C – 89/05) European Court of Justice
13 July 2006 helped define a bet. Customs disagreed with the claim by the
company that there was an exempt supply. Appeals to the VAT tribunal, High
Court and Court of Appeal all found for Customs. On further appeal to the House
of Lords, it referred to the European Court of Justice for a preliminary
ruling. The basic outcome was that it was considered that accepting the bets is
just a stage in the process; it could not be classified as a betting transaction
within the meaning of Article 13B(f).
The basic facts were, Littlewoods decided to outsource part of its telephone
bookmaking operations to Vertex. Under the contract, Vertex was authorised to
act as Littlewoods’ agent and was required to provide staff, premises and
telephone equipment necessary to take bets. Littlewoods decided what could be
bet upon, and managed the relevant revenue and expenditure. Vertex simply took
the calls and recorded the bets in accordance with conditions stipulated by
The final decision was that the provision of call centre services to a
telephone bookmaking organiser did not constitute a betting transaction and was
therefore subject to a VAT charge. As the final transaction was exempt this
would cause a disadvantage.
The 2007 Budget was statement of an unusually concerted charm offence to try
and make the UK a centre for on-line gaming companies but it is generally
considered it is not enough.
The on-line gambling/gaming business is growing at a vast rate. The profit
potential is gigantic – Sportingbet announced a £103m profit in October 2006.
It is considered in this case that both on-line Poker and Casino drove the
growth. Party Casino was launched in 2006. There are always “emerging games”
being launched such as Backgammon. This is in addition to all the horseracing
and sports betting.
It is an industry that will involve a lot of regulation and as the market
grows “like topsy” it will continue to need new dedicated business briefs to
control the VAT treatment and no doubt due to the large sums involved, it will
need decisions to be made in the European Court of Justice.
For those involved in the industry, a simple blink could miss a change and it
is unthinkable what you would come back to after a two week holiday without your
email and your mobile contact ………
For the tax adviser the gambling industry will impact upon virtually all
practices within the UK. Most firms have a client base that somewhere will
include a gaming machine, a bookmaker, a (possibly hidden) number of gamblers
and tipsters together with a large number of investors (and potential investors)
in this vibrant world. It will be essential to understand all the basic rules
of the game…
About the Author
Butler & Co specialise in the
farming and equine industries, focusing on preparation of accurate, detailed
accounts combined with expert tax advice and planning, particularly in the
fields of Inheritance Tax and Capital Gains Tax.
Julie Butler FCA can be contacted by Tel: 01962 735544 or Email;
Butler & Co.
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Article Published/Sorted/Amended on Scopulus 2007-05-14 20:57:06 in Tax Articles