Does the UK Treasury Need iGaming to Thrive?

Posted by Harry Kane on Monday, November 11, 2019

At first glance, you may feel as though the UK government is taking an increasingly hardline stance on the nation’s gambling industry.

After all, it was the Department for Digital, Culture, Media and Sport that slashed the maximum FOBT betting threshold from £100 to just £2 last year, whilst the Treasury also moved to hike the rate of Remote Gaming Duty (RGD) payable by operators by 6% in the autumn.

Whilst these measures may appear to be indicative of a regime that wants to tighten iGaming legislation and safeguard punters, however, the revenues generated by the Treasury through taxing gambling operators remain extremely important to the government during a challenging economic period.

In this post, we’ll ask why the government needs the iGaming industry to thrive, and consider whether the delicate balance between regulation and taxation can be maintained over a sustained period of time.

How Valuable is iGaming to the Treasury?

There’s no doubt that UK gambling operators are facing a challenging time at present, largely as a result of the FOBT betting cap and the volatility created by Brexit.

Whilst the Treasury may have also played a pivotal role in exacerbating the uncertainty in the marketplace, they’ve also tailored their legislation to ensure that they don’t see a significant decline in the amount accrued through tax revenues.

This is borne out by the figures, which were revealed in a recent study commissioned by HM Revenue and Customs (HMRC).

Detailing the latest numbers in its UK Betting and Gaming Statistics Report, HMRC claimed that the government’s gambling tax take peaked at £1.463 billion in the six months ending September 30th, with this figure having increased by 0.5% in comparison with the same period in 2018.

Whilst this may seem like a modest increase, it’s quite telling given that a number of multi-channel operators have been forced to lower their profit projections for 2019 and shut down a high volume of high street outlets.

William Hill has recently announced the closure of up to 700 brick-and-mortar stores, for example, whereas their rivals Ladbrokes may ultimately shut the door on more than 1,000 outlets.

If we drill down deeper into these figures, it’s even more apparent that the UK Treasury is constantly looking to modify tax regulations to compensate for any forced reduction in operator earnings.

For example, the implementation of the 6% RGD hike was brought forward to April 1st, with iGaming operators now required to pay 21% on their casino revenues. As a result of this, HMRC’s RGD haul totalled an impressive £332.4 million between April 1st and September 30th this year, up from £263.9 million in the same period of 2018.

This represents a huge 26% increase year-on-year, whilst online taxes grew to account for 22.7% of HMRC’s total gambling haul during the period.

The scale of this increase is extremely insightful, particularly when you consider it alongside the impact of the FOBT cap that was also rolled out on April 1st. More specifically, the Treasury earned £270.3 million from Machine Gaming Duty (MGD) in the six months ending September 30th, with this sum having declined by 24.2% year-on-year.

In the three months ending September 30th, the total gains from RGD levies were up by 47.4% (a total gain of £63.4 million) in comparison with last years’ figures. In comparison, MGD revenues fell by one-third during the same period, equating to an eerily similar loss of £61.1 million.

Clearly, there’s method in the madness of the Treasury and HMRC, with the strategic decision to increase the RGD by 6% having more than compensated for the losses incurred by the FOBT cap.

This has even enabled the government to marginally increase its revenues in the six months ending September 30th, as it continues to profit whilst operators are forced to adjust their models and develop brand new commercial strategies.

The Government and iGaming – A Complicated Relationship

Ultimately, the UK government remains in a difficult position when it comes to the regulation and taxation of gambling in the UK.

After all, pressure groups and charitable organisations are constantly agitating for change and a more stringent regulatory approach from the government, with such gentle persuasion responsible for the decision of the Culture Secretary to slash the FOBT betting threshold to just £2.

At the same time, the Treasury has a duty to optimise tax revenues and leverage growth markets such as the iGaming space, in order to increase the amount reinvested into the economy periodically.

Arguably, the need to optimise tax revenues from growth markets is even more pressing in the current economic climate, with the UK’s GDP projected to take a significant hit regardless of how it eventually leaves the EU (even Boris Johnson’s much-vaunted withdrawal agreement could ultimately cost the UK a total of £70 billion).

This obvious dilemma has clearly influenced the government’s strategy of late, as whilst it has publicly sought to adopt a hardline approach, it has also taken calculated measures to mitigate its own losses and safeguard its revenues in the near-term.

The question that remains, of course, is whether or not this delicate balancing act can be sustained indefinitely? After all, whilst the decision to increase the RGD rate my have offset the revenue lost as a result of the FOBT cap, it’s interesting to note that both of these measures will have a seismic impact on the growth of operators going forward.

This is particularly true for multi-channel operators, including market leading brands such as William Hill, Ladbrokes and Paddy Power. As we’ve already touched on, these companies have already announced significant store closures and job losses nationwide, whilst they’ve also seen their profit projections decline as a result of the RGD hike.

Given that these firms are the heartbeat of the iGaming industry, the government’s legislative strategy represents a huge risk in the longer-term. This is because the Treasury remains reliant on growth markets such as the iGaming space to thrive, and undermining the growth of the market leading brands could prove extremely detrimental over time.

This could even increase the risk of leading operators relocating to tax-friendly destinations overseas, and in this respect, the government may need to reconsider it’s strategy over the course of the next 12 months and beyond.