UK Budget 2019 – What Does It Mean for Operators?

Posted by Harry Kane on Friday, November 23, 2018

It’s fair to say that Chancellor Philip Hammond’s recent budget announcement was hotly anticipated, after months of speculation concerning what it may entail. Brands within the virtual gambling sector were particularly on edge, amid rumours that the Treasury was set to increase the Remote Gaming Duty (RGA) beyond the current rate of 15%.

The Chancellor definitely delivered on this promise, while also announcing that the implementation date for the impending FOBT betting cap will be brought forward by a single quarter.

In this article, we’ll explore the detail of the autumn budget while asking what impact it’s likely to have on the gambling industry and individual operators.

Increasing the RGA – How will It Impact on the Market?

Speculation has been rife that the Treasury would increase the RGD for months, with the government keen to increase its revenues against the backdrop of an uncertain economic climate.

From potential changes to Brexit-related regulations and the long-term status of gambling haven Gibraltar to the legislation that will slash the maximum betting threshold for FOBTs from £100 to £2, Hammond has been tasked with the job of increasing government revenues without impeding long-term market growth.

Unfortunately, the prosperous online gambling sector represents an easy target for higher tax levies, so the decision to increase the RDG to a hefty 21% was deemed as inevitable by industry insiders. However, this is also an immensely disruptive move and one that may spark a series of chain reactions throughout the industry.

To understand this further, we need to consider the hike in the context of the challenges facing the market. Aside from the impact of Brexit, operators are also adapting to wave after wave of regulatory changes and guidelines, as the UK Gambling Commission (UKGC) looks to uphold the integrity of the industry and introduce safeguards for vulnerable players.

In this respect, the RGD rate rise could represent the final straw for some operators, particularly smaller betting brands with minimal profit margins.

This could trigger two potential shifts in the gambling marketplace. The most likely is an increase in the number of large-scale mergers and acquisitions, as smaller operators look to alter their market focus or sell their assets to a larger market player. Some brands may also look to merge with an overseas company and downsize their UK operations, in order to increase their profitability over time.

Not only would this be a logical response to the RGD increase, but it would also continue a prominent trend within the industry. After all, we’ve recently seen a spate of mega deals involving brands like GVC and the Stars Group, as operators look to adapt in a constantly changing and fast-evolving space.

With the new rate of tax set to be officially introduced in October 2019, we could well see a raft of mergers and acquisitions begin to unfold during the first quarter of next year. Make no mistake; the market-leading operators are likely to adopt a proactive approach to strengthening their brands, as they look to capitalise on the market’s conditions and strive to achieve the best possible deals.

Some operators may also begin to consider the notion of relocating overseas, with EU-territories such as Malta offering an attractive proposition to brands.

Not only is this EU jurisdiction a gambling safe haven with low corporation tax rates, but it’s also assured to retain single market access post-Brexit. The same cannot be said for the UK or even Gibraltar in the long-term, while the former’s increasingly prohibitive tax levies are placing a significant squeeze on the industry’s profit margins.

A Double-Whammy – Bringing the FOBT Cap Forward

Of course, one of the main catalysts for the RGD hike was the decision to slash the FOBT threshold, which was revealed after an extensive investigation in the spring.

By reducing the maximum wager from £100 to just £2, the government struck an extremely damaging blow to the offline gambling sector and hamstrung one of its most lucrative revenue streams. At present, betting shops earn a staggering 56% of their profits from fixed-odds betting terminals, while the Bookmakers Association revealed that the £2 cap could trigger the closure of up to 9,000 outlets nationwide.

Interestingly, the government subsequently agreed to delay the implementation of the cap indefinitely, delivering a potential revenue boost of up to £4 billion to operators. While many believed that this delay would eventually see the cap introduced in April 2020, the Chancellor used his recent budget to announce that it was being brought forward to the autumn of 2019.

In this respect, Hammond’s autumn budget has delivered something of a double-whammy to multi-channel operators in the gambling industry, as they’ll be required to pay a higher rate of RGD and see their offline profits slashed in the space of just 12 months. This will squeeze the market leaders’ margins from both ends, with the combination of higher costs and lower profits likely to have a seismic impact on the industry’s growth portents.

This will definitely be evident in the short-term, with the decision to bring the cap forward by six months forcing operators to revise their already conservative earnings estimates.

Paddy Power have revised their own forecasts to showcase a 2% decline in earnings in 2019/20, for example, while William Hill are also predicted a 9% decline in revenue during the same period.

Not only is this another example of the uncertainty and disruption facing operators in the current climate, but brands are also likely to feel a little cheated by the actions of the Treasury. After all, it was initially suggested that the RGD would be increased to 20% in order to cover the cost of the FOBT cap delay, but the Chancellor hiked this to 21% despite bringing the new legislation forward by six months.

This is also likely to create a bad taste in the mouth of operators, and there’s no doubt that the market could be braced for some significant upheaval over the course of the next 18 months.