In the eye of the storm

Consistently singled out by anti-gambling campaigners and some mainstream media outlets, FOBTs – dubbed the ‘crack cocaine of gambling’ – have sullied the UK industry’s image like no other product. Not that the sector’s reputation was exactly squeaky clean in the first place. So when Chancellor Philip Hammond announced in his Autumn Budget that bookmakers would be given until October 2019 to prepare for stakes to be slashed from £100 to £2 per spin, it sparked outcry and prompted Sports Minister Tracey Crouch to resign.

FOBT opponents saw it as a ruse to elongate the transition phase and allow bookmakers to collect as much money as possible from their highly lucrative machines before the stake reductions came into force. A fortnight later, following mounting pressure over the timeline, the government was forced into an embarrassing climbdown; changes to FOBT stakes were to be brought forward to April 2019. As was the rise in Remote Gaming Duty (RGD) from 15% to 21% ­– described by the Remote Gambling Association as “a stiff hike”. You see, RGD is being raised to plug the hole in lost tax receipts from the recalibrated FOBTs.

If you’re the boss of a UK-licensed, online-only gambling operator that has never had high street shops, you have the right to feel more than a touch aggrieved. Your business is essentially paying the price for the FOBT clampdown, and now six months sooner than was previously declared. While the established international online giants will be best equipped to absorb the tax rise, the smaller UK-facing egaming operators could be the ones hit hardest. They don’t tend to have the scale and financial reserves to match their larger counterparts, many of which have morphed into global powerhouses through M&A deals.

Consistently singled out by anti-gambling campaigners and some mainstream media outlets, FOBTs – dubbed the ‘crack cocaine of gambling’ – have sullied the UK industry’s image like no other product. Not that the sector’s reputation was exactly squeaky clean in the first place. So when Chancellor Philip Hammond announced in his Autumn Budget that bookmakers would be given until October 2019 to prepare for stakes to be slashed from £100 to £2 per spin, it sparked outcry and prompted Sports Minister Tracey Crouch to resign.

FOBT opponents saw it as a ruse to elongate the transition phase and allow bookmakers to collect as much money as possible from their highly lucrative machines before the stake reductions came into force. A fortnight later, following mounting pressure over the timeline, the government was forced into an embarrassing climbdown; changes to FOBT stakes were to be brought forward to April 2019. As was the rise in Remote Gaming Duty (RGD) from 15% to 21% ­– described by the Remote Gambling Association as “a stiff hike”. You see, RGD is being raised to plug the hole in lost tax receipts from the recalibrated FOBTs.

If you’re the boss of a UK-licensed, online-only gambling operator that has never had high street shops, you have the right to feel more than a touch aggrieved. Your business is essentially paying the price for the FOBT clampdown, and now six months sooner than was previously declared. While the established international online giants will be best equipped to absorb the tax rise, the smaller UK-facing egaming operators could be the ones hit hardest. They don’t tend to have the scale and financial reserves to match their larger counterparts, many of which have morphed into global powerhouses through M&A deals.

Pick a number

The new rate of 21% puts the UK at the upper end of major regulated markets in Europe; in Spain, Italy and Denmark for example, RGD is pegged at 20%. But the fact the UK has adjusted it to the somewhat precise level of 21% raised eyebrows in some quarters. “Why on earth is it 21% and not a clean and tidy figure like 20% or 25%?” asks Regulus Partners’ Paul Leyland. “Someone has picked a fiddly number, so why not 22.527%?” Most industry observers has been predicting 20%, with a worst-case scenario being 25%. So while the increase was slightly above the anticipated rise, the industry probably breathed a collective sigh of relief.

The increase is expected to raise somewhere between £200m and £250m a year for Treasury coffers. “It’s not in the scheme of things that big a deal, but obviously there is an additional cash-flow cost,” Leyland remarks. “The fact that it is going up six months earlier doesn’t make a huge amount of difference, but I think the more interesting question is does a 21% GGR tax start to create a larger black market? It’ll never be a market worth tens of millions of pounds but it will still be there.”

Due to the country’s currently favourable 15% tax rate for online sports betting and gaming, introduced in 2014, it’s estimated that just 5% of UK gamblers opt to use the black market as opposed to UK-licensed options. In other regulated jurisdictions with far more burdensome tax rates, such as sports betting in Portugal (taxed between 8% and 16% of handle depending on volume of bets, which is equal to a tax rate of up to 60% of GGR), just half of all players gamble through legal channels. Research suggests tax rates of 20% on GGR channels at least 80% of the market through licensed sites.

Veteran gambling consultant Steve Donoughue doubts whether a 21% GGR tax on remote gaming will lead to a proliferation of the black market in the UK. “All the stuff I’ve seen suggests that doesn’t happen until about 25%. If you look at the debate on the Gambling Licensing and Advertising Act of 2014, which brought in the PoC tax, there was a big argument saying we’d have a black market. And it was accepted by Treasury that the rate of 15% would lead to this. But there has been no research done as to whether we do have a black market – I’ve never seen any evidence of it.”

A sporting chance

Now that RGD is set to go up in April, there is a train of thought that if 21% generates the forecasted returns for HM Treasury, lawmakers could turn their attention next to sports betting duty. “I would suggest that betting duty will go up,” says Donoughue. “It’s too easy to do, I mean who is fighting back on this? The core problem for online is it doesn’t have a political constituency in this country. If you speak to MPs, they look on the online gambling industry as a bunch of tax evaders based in Malta.”

That said, a sportsbook is a considerably more volatile and expensive product to offer customers than computer-generated spinning reels or pixelated table games governed by an RNG sitting on a server in Malta. Leyland says: “Sports betting should be lower [than online gaming] because horseracing has the levy, but also because sports betting costs more to run – from traders to betting shops. It’s more cost-intensive than gaming.” Yet he warns: “Sports betting [duty] is pretty likely [to go up]. But does everything get moved up to 25%?” Rates encroaching into the realms of 25% would be difficult to swallow for firms operating in a mature and heavily crowded market like the UK.

Right now, though, storm clouds hang ominously over the market. Besides the RGD rise, regulatory pressure from the Gambling Commission means operators are having to carry out stringent source of wealth checks on VIP players. Meanwhile, there’s growing uproar at the level of gambling advertising and sponsorship, which could lead to a pre-watershed ban on ads, as well as calls for a 1% gambling levy on GGR to help fund gambling addiction treatment. It’s been suggested this could raise an estimated £140m a year.

“What we are going to end up with is an industry very overly regulated and very overly taxed,” says Donoughue. “That means no newcomers, no innovation and just a few big operators not making very much money. And politically, no-one gives a crap. We’re on a downward spiral.” On top of this, the public’s perception of gambling arguably at an all-time low, partly fuelled by certain mainstream media outlets seemingly pursuing a vendetta against the industry. With the sector very much under siege, the knock-on effect of all these pressures could mean certain online operators decide to wash their hands of the UK. A rise in duty on sports betting would force that decision.

Donoughue, who by the way expects half of the near-9,000 betting shops to close within three years after the FOBT stake reduction, says: “If you are a big operator and already on very tight margins, there will come a point where your say, ‘why do we bother with the UK’? Everyone is a global player and if you are having to pay shitloads of tax and problem gambling levy, and you have got a regulator who could fine you a number that is pulled out of a hat, you might go, ‘yes, the UK is the biggest European market but it’s just not worth the risk’.” With so much drama thus far in 2018, the industry will be desperately hoping 2019 is a great deal more subdued on the regulatory front. If anything, though, next year seems poised to be even more tumultuous for UK operators.