How Lucrative Аre Online Gambling Taxes?

Posted by Harry Kane on Wednesday, June 27, 2018

Even by conservative estimates, the UK’s online gambling market represents a considerable growth market. This makes it relatively unique in the current economic climate, as the spectre of Brexit continues to loom large over the nations’ industries and marketplaces.

In the year ending 2017, online gambling generated a gross gaming yield (GGY) of £4.7 billion, while the virtual sector evolved to claim 34% of the industry as a whole. At the same time, technological advancements such as virtual and augmented reality are being leveraged to create new opportunities for future growth and diversification, so the market has some way to advance before it realises its full potential.

However, while this growth is usually considered in terms of operators and the individuals who frequent online casinos and sports betting hubs, it’s also fair to surmise that it also contribute huge sums to the UK economy through tax levies.

In this article, we’ll exactly how much the online gambling industry generates for the British government, while asking what potential changes in the future may mean for operators and the marketplace as a whole.

Online Gambling and Taxation – A Brief History

By its very nature, it’s obvious that online gambling is a relatively new phenomenon, and one which has only become commonplace in the digital age.

The proliferation of virtual casinos and wagering is indicative of a wider change in the gambling industry as a whole, which has seen sports betting and casino games legalised and regulated across numerous channels to help safeguard consumers and generate viable profits for taxation.

Prior to the Betting Gaming and Lotteries Act of 1960, all off-course betting in person was illegal, while from a remote gambling perspective only wagers placed by telephone were permitted due to an existing legal loophole. Even then, the legislation of the sixties only provided primitive regulations for bricks-and-mortar gambling, while introducing taxation levies for licensed casinos.

However, when online casinos first emerged in the mid-1990s, the UK government recognised both the need for change and the potential scope for profit within the digital space. To reflect this and the rapidly changing nature of the marketplace, the government established the Gambling Act of 2005, which sought to control all forms of gambling while also assuming responsibility for regulatory compliance and creating a framework through which taxable revenue could be generated (we’ll explore this in further detail below).

This revolutionary legislation also saw the establishment of the UK Gambling Commission (UKGC), which is responsible for overseeing on and offline activity and ensuring that the industry remains compliant with British law.

The UKGC also licenses online operators and enables operators to offer iGaming products in the UK marketplace, which in turn makes it eligible to pay tax and make a contribution to the UK treasury based on its structure, earnings and precise mode of operation.

How Much Tax do British iGaming Firms Pay?

While the legalisation published in 2005 helped to establish a framework for compliance and taxation, however, the sustained diversification of the online gambling marketplace has forced the government to publish several updates and amendments.

The most recent of these took the form of the Gambling (Licensing and Advertising) Act of 2014, and this clarified a number of different duty categories to suit the various practices available to players. The most dominant was known is referred to as the Remote Gaming Duty, which covers both online bingo and virtual casino gameplay and is paid by relevant operators for any profits generated on wagers placed by UK customers.

This is fixed at 15% of gross profits, and contributes a considerable sum when you look at the industries most recent financials.

In contrast, lotteries are charged under Lottery Duty, although this carries a 12% levy on all stake money wagered (and payable) within the accounting period.

Perhaps the most interesting (and complex) aspect of modern taxation and the 2014 amendments revolve around offshore brands, including British companies that sought to leverage the 2005 Gambling Act by operating from UK-approved, white-listed territories such as Malta and Gibraltar. While the 2005 regulations enabled British firms to optimise their profitability by accessing lower corporate tax rates in these jurisdictions, the latter legislation looked to offset this by the introduction of new and more stringent levies.

The key feature of this was the introduction of a so-called Point of Consumption (POC) tax, which was fixed at 15% and applied as games were played. This controversial measure marked a significant shift and tightening in attitudes in the UK marketplace, as the government looked to regulate how it collected tax from the industry and sought to protect customers from rogue operators that hid behind the previous legislation.

This applies to all operators that offers gambling channels and games from an offshore location or jurisdiction, and the subsequent revenue is payable directly to HM Revenue and Customers (HMRC) in the UK (aside from a handful of exemptions).

Offshore operators will also have to pay either General Betting Duty or Pool Betting Duty, or in some instances both. The former, which is known colloquially as GBD, is derived directly from profits on general wagers made by UK customers on horse or dog racing, and offer the following, variable rates to customers:

• A 15% rate for fixed odds bets
• A 3% rate for financial spread bets
• A 10% rate for all other spread bets
• A 15% rate of the commission charged by betting exchanges to UK users

In the case of pool betting duty, this levy is derived from any profits made from bets that do not offer fixed odds to customers or are not associated with horse or dog racing. It is also characterised by a 15% rate, which aligns it with Remote Gaming Duty and the existing POC levy.

As we can see, the government has created a relatively complex and diverse series of tax regulations for UK operators, particularly those that have looked to leverage lower corporate tax rates in jurisdictions such as Malta and Gibraltar.

However, it’s interesting to note that the government does not require individual customers to pay any tax on their winnings, so online gamblers can retain every penny that they earn through their wagers. This is not always the case for bricks-and-mortar casinos, with Vegas establishment known to charge a base rate of 30% on any winnings earned by overseas visitors whose haul is larger than $5,000.

Similarly, the previous tax regulations in the UK required gamblers to pay tax on their on and offline winnings, but this legislation was removed from British law back in 2001.

How Much Is the UK Making from Online Gambling?

The question that remains, of course, is how these rates translate into pure government revenue. According to Statista, cumulative betting and gaming tax receipts in the UK peaked at £2.7 billion in 2017, which marked an increase of more than 100% compared with the figures from 10 years earlier.

However, this figures does not distinguish between in-person bets and online wagers, so we need to drill down deeper in order to determine precisely how lucrative virtual gambling is.

Let’s take the GGY for online gambling in 2017, which has we said earlier totalled a record £4.7 billion. This was driven primarily by slot games, which accounted for 54% of this yield and generated £2.6 billion for operators during a lucrative, 12-month period.

By applying a generic, 15% tax rate to this number, we draw an estimated revenue to the tune of £705 million. Of course, a small proportion of this revenue will be subject to a base tax rate of 12%, while some offshore companies may pay a little more depending on their circumstances.

In general, however, 15% represents the taxation standard for the online gambling operators that are active in the UK, so we should take this sum as a fair gauge when identifying the extent to which the government profits from virtual gameplay.

The way in which you perceive this number depends entirely on the context in which you choose to analyse it. In some respects, it can be argued that tax returns of around £700 million are less than you may expect for a multi-billion pound sector, while it is a number that would scarcely make a dent in the UK’s total GDP of £1.9 trillion.

In fact, it would barely provide funding for a single infrastructure works product in the nation, so we’re not talking about game changing sums for the government.

We must accept that the GGY for online gambling is set to increase incrementally in the near-term, however, while the government may well choose to impose more stringent tax levies in order to offset any losses experienced as a result of Brexit. This would create a scenario where the British government is able to secure more than £1 billion in tax revenue from this market, while compromising the profitability of both on and offshore operators.

Balancing Taxation with Jobs and Growth

Historically, it has been argued that government bodies cannot simultaneously regulate online gambling while also earning tax revenue from the industry, as this creates a potential conflict of interest.

The government and associated agencies such as the UKGC has shown an increased willingness to sacrifice a proportion of tax revenue in order to safeguard players and the reputation of the industry, however, with both of these representing key strategic objectives for the commission. This commitment was borne out by the recent decision to cap fixed-odd betting terminal (FOBT) thresholds at just £2 (it was initially £100), as this will diminish tax returns significantly while also forcing some outlets out of business.

This no-nonsense approach is also impacting in the online gambling realm, where the UKGC has recently discussed placing restrictions on how operators advertisers and promote their products. Not only this, but Chancellor Philip Hammond also flirted with the idea of triggering a hike in the 15% POC tax prior to his autumn budget last year, only to avoid this course of action at the last minute.

Whether this was considered as a way of regulating the online marketplace or boosting government revenues post-Brexit remains unclear, of course, but there’s no doubt that this and similar tax hikes could be implemented in the near-term.

Sky Bet CEO Richard Flint is one of many who has warned the government about imposing further tax hikes on British and offshore operators, however, by claiming that this could create an unsustainable business model and force some operators to relocate overseas.

So, while there’s a willingness among operators to to pay higher tax rates rather than basing themselves overseas, this will not be the case if levies are increased much further. Some operators have already claimed that they pay around 30% of their revenue in tax (including all gaming duties and VAT), and this appears to represent a tipping point for many in terms of what they’re happy to contribute.

Should the government risk disturbing equilibrium, operators may be encourage to seek out potential savings overseas while simultaneously minimising the amount that they pay to the HMRC in tax.

In addition to lost earnings, the British government may also be burdened with higher unemployment and economic stagnation should companies relocate, compounding any potential losses with an increase in welfare payments.

The Last Word

This is why taxing lucrative markets of this type is so challenging, as it’s crucial that governments profit from growth while also incentivising further expansion and job creation in the future.

A long-term outlook is crucial here, as central governments must set tax in line with the other contributions made by each sector, rather than simply focusing on the money generated through general, POC and remote gaming levies.

This was the central point of the 2005 Gaming Act, and it’s crucial that the current government doesn’t overlook this. Otherwise, it runs the risk of doing long-term harm to the economy at a time when this can be ill-afforded.

Richard Flint, chief executive at the online betting and gaming company, said it would this year create 200 high-tech jobs at its Yorkshire site to add to the 1,300 people it already employs there.

But he said the company had written to the Chancellor to warn against a rise in the 15pc “point of consumption tax” which was implemented in December 2014.

The tax is payable on all bets made by UK customers regardless of where the operator the bet is placed with is based. Previously offshore gambling companies could make money from bets made by UK citizens but these were not taxed.

The taxation rates for online gambling in the UK are fair and the profits made by the government from this activity aren’t as staggering as you might have thought. However, it’s still an industry on the rise so we may as yet see this taxation profits heading up into the billions very, very soon.