Adviser Q&A: Proposed changes to the taxation of remote gambling

What is this about?

HM Treasury is consulting on draft legislation, due to be included in Finance Bill 2014, which is designed to ensure that remote gambling operators with UK customers pay UK gambling taxes, no matter where they are based.

The rules would change the taxation of remote gambling from a ‘point of supply’ to a ‘point of consumption’ basis, from 1 December 2014. They also address concerns from respondents to a consultation on the proposals over the definition of ‘UK persons’ and enforcement of the new regime.

As a result, remote operators with UK customers would be liable to pay either remote gaming duty, general betting duty or pool betting duty, all of which are currently at 15%.

How did we get here?

The consultation document sets out the government’s conclusions from a consultation process dating back to September 2011.

The current position is that UK gambling duties (remote gaming duty, general betting duty and pool betting duty) are payable only by those remote gambling operators that operate from Great Britain. They have until recently been payable by such operators in respect of all business, whether it related to UK or non-UK residents (i.e. on a ‘point of supply’ basis).

FA 2012 introduced double taxation relief for operators liable to pay a UK gambling duty, but also a qualifying foreign tax in respect of the same gambling transaction. This was necessary as other jurisdictions had begun to regulate and tax internet gambling on a ‘point of consumption’ basis, which made British operators potentially liable to pay tax in both countries with regard to the same transaction. The government now proposes to repeal this relief, in connection with the switch to ‘point of consumption’ taxation in the UK, as British operators will no longer have to pay gambling duties here in respect of transactions which are not with a ‘UK person’.

However, it was the implications of the Gambling Act 2005 (GA 2005) which prompted the consultation. GA 2005 permits access to the British market to operators who do not hold a British licence provided they are licensed in an EEA or ‘white list’ jurisdiction. Consequently, the vast majority of operators servicing the British market are based in low tax overseas locations, such as Malta, Gibraltar, Alderney and the Isle of Man and pay no UK gambling taxes.

The tax changes are closely associated with the proposed alterations to GA 2005 which, if passed, will require any remote gambling operator who intends to offer its services to residents of the UK to obtain a UK remote operating licence, thereby also changing remote gambling licensing to a ‘point of consumption’ basis.

The changes to GA 2005 are progressing, and the tax changes will dovetail with them. Although the government has said they are not interdependent, the enforcement provisions outlined in the Treasury proposals rely considerably on measures such as suspension and revocation of remote operating licences. It remains to be seen whether black market operators are able to avoid tax and licensure and yet still access the UK market. No financial transaction or ISP blocking measures are currently proposed.

Would this be a welcome change?

The proposed move to ‘point of consumption’ taxation will level the playing field to the advantage of those who currently pay UK taxes, and it will lead to potentially significant tax revenues. However, the proposal is undesirable for many operators currently offering remote gambling into the UK market because it will considerably raise costs. It has been suggested that this could stifle investment, affect the consumer experience by worsening odds/prices, and restrict choice. Furthermore, there is the risk of tax avoidance by operators who do not submit to licensing and do not register for and pay duty.

The key issue to ensuring the market survives with healthy levels of competition and compliance is to get the tax rate right. Many operators have lobbied for a rate considerably lower than the 15% of gross profits that currently applies to the relevant duties, arguing that such a high rate will encourage avoidance.

What are the points for advisers?

Gambling duties will be payable on profits derived from transactions entered into with a ‘UK person’, which is defined in the draft Finance Act provisions as an individual who usually lives in the UK or a body corporate which is legally constituted in the UK. This means tax will not be payable on bets made by visitors to the UK who do not usually live here, but will be payable on bets made by UK residents abroad.

Meanwhile, while joint and several liability for gambling duties will be imposed for those operating a network (such as a poker network with the customers of various operators playing), it will only extend to those in the same corporate group. The government has also dropped the original proposal to extend joint and several liability to ‘critical partners’ of non-compliant operators, such as affiliates.

Advisers should take careful note of the registration and compliance requirements when advising clients. This is of particular importance for operators based in overseas jurisdictions with which the UK does not have a reliable debt collection and assistance agreement in place (and which are not part of a group registration). This is because such operators will be required either: (i) to appoint a joint and severally liable fiscal representative; or (ii) to appoint an administrative representative (who will not be liable) and provide HMRC with a security (expected to be equal to six months’ estimated duty liability).

Failure to provide a requested security to HMRC and failure to appoint a fiscal or administrative representative will be summary offences, and the penalties for fraudulent evasion of duties will be harmonised.