Brexit and Online Gambling – How Will the UK Fare?

Posted by Harry Kane on Saturday, June 23, 2018

With the UK scheduled to officially leave the EU on March 29th 2019, there’s now less than a year ago before Brexit becomes an actionable reality. Despite this, the British government remains extremely divided over how the UK should operate post-Brexit, with uncertainty surrounding membership of the Customs Union and the future validity of the Good Friday agreement unlikely to be resolved anytime soon.

With a number of huge issues to resolve before the true nature of Brexit begins to take shape, there’s scarcely been any time to consider how leaving the European Union will impact on the most lucrative industries in the UK.

Take the nation’s gambling sector, which has enjoyed exponential growth in recent times and benefited from significant innovation in the virtual marketplace. In this article, we’ll look at how Brexit is threatening to impact on the UK’s gambling industry, including key jurisdictions such as Gibraltar and Malta.

The Size of the UK Market – Why Brexit’s a Big Deal

Before we delve into the complex and unforgiving detail of Brexit, however, it’s important to understand the sheer size of the gambling industry in the UK. After all, this is arguably the most progressive and best-regulated market of its type in the world, and one that sustains thousands of jobs while generating considerable amounts in terms of taxable revenue.

In the year ending March 2017, the UK Gambling Commission (UKGC) reported that the industry generated a gross gaming yield (GGY) well in excess of £14 billion. This was up from the figure of £13.8 billion reported in the year ending March 2016, showcasing incremental growth and diversification in the face of considerable financial challenges.

Even more impressive was the sustained expansion of the UK’s online gambling niche, however, which peaked at a staggering £4.7 billion at the end of last year. This represented a 10.1% increase on the previous year, while it also meant that the online sector of the market had evolved to claim a total market share of 34%.

While a recent clampdown on fixed-odds betting terminals (FOBTs) in high street bookmakers throughout the UK may ultimately skew the corresponding figures for 2018, the online market is expected to grow incrementally and claim an even more dominant share of the industry as a whole.

In fact, this trend is likely to continue for the foreseeable future, while the sustained innovation of technologies including virtual reality and cryptocurrency may ultimately see online gambling account for 50% of all activity in the near-term.

The Impact of Brexit – All Eyes on Gibraltar

Given the size, scope and future potential of the gambling market in the UK, it’s imperative that both industry leaders and the government understand the potential impact of Brexit. One of the key areas of focus is offshore jurisdictions such as Gibraltar and Malta, which have historically served as low-tax havens for gambling firms from across the globe.

Gibraltar boasts particularly low corporate tax rates, for example, while it’s status as a British overseas territory that shares a physical land border with EU member Spain has placed it firmly at the centre of increasingly uncomfortable Brexit negotiations. One of the most prominent challenges surrounded Gibraltar’s continued access to the single market, which is central to its appeal as a commercial and gambling industry haven.

Conversely, the UK market accounts for more than 90% of all business conducted by Gibraltar-based companies, creating a complex and volatile scenario in which it was possible for all parties to lose out.

Fortunately, the UK government has managed to buy some time, after negotiating a temporary deal with the EU that will enable Gibraltar to enjoy unfettered access to both markets until 2020. This agreement will have the single biggest impact on the gambling industry and the financial services sector, while ensuring that Gibraltar can sustain its own economy in the near-term and continue to host London Stock Exchange-listed operators without issue.

Beyond this, it will be the responsibility of the UK government (in tandem with the Gibraltar authorities) to design a replacement framework that can be implemented post-2020. This agreement will need to be extremely complex and detailed, and one that is based on shared standards of regulation and enforcement throughout the online gambling market.

In order for the UK and Gibraltar gambling sectors to grow at a viable rate, there’s also the need for a progressive agreement that prioritises information-sharing and transparency, as this creates the potential for valuable liquidity pacts to be developed in the future.

If these two parties cannot agree a viable deal or the negotiation process becomes drawn out, both the UK and Gibraltar could lose valuable business to similar, online gambling hubs like Malta. Make no mistake; the loss of access to the single market and a future inability to trade from Gibraltar could encourage some UK operators to relocate to Malta, which also boasts a low corporate tax rate and beneficial regulatory measures while being home to numerous gambling firms.

This would have a seismic impact on the UK gambling market, while also devastating the economy of Gibraltar in the process. As a result, there is much work to be done for the UK to secure the long-term growth of its online gambling industry, particularly once the current framework expires in 2020.

What About Taxation post-Brexit?

In recent times, it’s fair to surmise that the UK government has leveraged the lucrative nature of the gambling industry to its advantage, primarily by imposing new and innovative taxes to boost public revenues.

The most obvious example of this was the so-called point of consumption (POC) tax, which has a starting rate of 15% and was implemented back in December 2014. It is focused on revenue earned within the UK by casino operators that are physically based in another location, and was designed to prevent offshore firms from avoiding taxation on British shores.

Alongside standard income tax and VAT (value-added tax), this has provided a huge boost in taxable revenues for the British government while creating more stringent regulations for firms that are listed on the London Stock Exchange but based in a jurisdiction that benefits from lower corporate tax thresholds.

So, under current British Law and EU directives, UK gambling operators pay a 15% consumption tax at the point of sale as well as a minimum, standard VAT rate of 15%. In addition to this, gambling operators declaring more than £300,000 in non ring-fenced profits will pay a basic corporate tax rate of 20% on these earnings, with those based in Gibraltar will pay a reduced rate of just 10%.

For the most part, British gambling operators have tolerated these tax levies, primarily because they’ve benefited from access to a vast marketplace with progressive regulatory measures in exchange. However, it’s unclear whether or not further tax hikes or the introduction of new levies would be as well-received, with Sky Betting and Gaming’s Chief Executive Richard Flint having previously urged the UK government not to increase the current rate of POC tax or VAT in the future.

Alarm bells were sounded in the sector following UK Chancellor Philip Hammond’s autumn budget, which suggested that online gambling operators benefited from generous tax treatment and failed to rule out any tax hikes in the near-term. As a result, executives such as Flint believe that the UK will emerge as an easy target for government taxation at the expense of industry growth and the sustainability of the marketplace as a whole.

It’s widely believed that the government may be considering increasing the tax burden of UK gambling operators as a way of combating the initial, financial impact of Brexit, which includes a formal divorce bill that could cost in excess of £39 billion in infrastructure payments.

This must be considered alongside the fact that the UK will lose free access to the world’s largest single market from March 29th next year, with fixed tariffs set to be implemented and the cost of trade between Britain and the UK likely to increase considerably.

While incrementally increasing the tax burden of UK and offshore operators may help to bridge this short-term financial gap, however, this only works for as long as these firms decide to remain within Britain’s jurisdiction. If firms such as Sky Betting and Gaming decide that such tax levies make their business unsustainable, they could choose to relocate to regions such as Malta within the single market and remove their contributions entirely.

This would also have a devastating impact on job creation in Britain, as well as reducing the nation’s GDP and restricting long-term economic growth considerably.

Of course, the UK will also have the potential post-Brexit to reduce the tax burden placed on native gambling operators. It will certainly have the autonomy to set its own rate of VAT, for example, while it could also choose to reduce the POC tax rate in order to establish the UK as a competitive tax haven for operators from further afield.

This remains unlikely for now, however, as the UK cannot afford to offer lucrative tax breaks to gambling operators at a time when the country’s economy is likely to be significantly stretched. With this in mind, the only question that remains is whether or not it can afford to increase the tax requirements within the industry, and this will represent a delicate balance for the government post-Brexit.

The Last Word – Will Brexit Help the UK to Crack the U.S?

With the UK set to lose single market access next year, it’s gambling operators are unlikely to partake in any liquidity sharing pacts with their European counterparts.

These agreements allow for the seamless sharing of data, technology and player pools between different nations, creating far greater potential growth and reduced operating costs over time. One such pact has already been signed by Spain, France, Portugal and Italy in the EU, while others are sure to follow over the course of the next decade or more.

While the UK may be realistically prohibited from joining in such pacts, however, Brexit will trigger a shift in focus that enables them to pursue alternative arrangements further afield. The burgeoning U.S. market remains a likely target for British operators and the UK Gambling Commission (UKGC), for example, who can lend their vast resources and regulatory excellence in a way that adds genuine value to American.

The foundations for this move were laid last year, when the American states of New Jersey, Nevada and Delaware announced that they would enter into a shared liquidity pact in the near-term. Since then, Pennsylvania governor Tom Wolf has signed a comprehensive expansion bill to legalise online gambling within the state, which is likely to create a four-way liquidity pact early in 2019.

By this time, Britain would be well-placed to participate in a cross-border pact, and one that could be worth millions to the UK market. With an agreement and a viable model already in place, the UKGC could focus solely on selling its regulatory expertise and successfully leveraging the huge swathes of data (not to mention additional resources) held by market leading operators in Britain.

This is not a done deal, of course, with the UKGC having previously tried and failed to negotiate a liquidity sharing pact with New Jersey back in 2015. Back then, the discussions reached an advanced stage before collapsing, with the precise details of the arrangement proving exceptionally difficult to define with any great clarity.

Such a deal should be far easier to strike in the current climate, however, particularly once the U.S. states have established a framework for the agreement and identified a clear role for the UKGC.

This would help to shape and revolutionise the post-Brexit gambling market in the UK, particularly from the perspective of online operators. The potential of such a pact also suggests that one of Britain’s true growth markets will have an opportunity to thrive even outside of the EU, thanks largely to its progressive nature, lucrative returns and ability to share its undoubted regulatory expertise and experience.