Studying the reform: the case for and against switching racing's betting levy to a turnover model

When the largely unfancied Noble Yeats, ridden by amateur jumps jockey Sam Waley-Cohen, outlasted 40 runners to land Aintree’s 2022 Grand National at odds of 50/1, it wasn’t just the bookmakers who were smiling that unseasonably warm April day.

A longshot winning the most bet-on race in the calendar was a favourable outcome for British horseracing’s key stakeholders as it provided a tidy boost to the betting levy, the sport’s central funding system. This statutory levy is charged at 10% of bookmakers’ gross profits on British racing above the first £500,000, which means favourites winning high-profile races typically have a negative effect on the sport’s finances – as was illustrated when lightly weighted ante-post favourite Corach Rambler triumphed in this year’s running of The Grand National.

The government committed to revisiting racing’s levy system by 2024, and the Department for Culture, Media and Sport (DCMS) revealed in the gambling white paper published in April that the process was now getting started “to ensure the appropriate level of funding for horseracing is maintained”. While mandating an increase on the current 10% is one possible outcome, the DCMS will evaluate the proposal to switch the levy to a model based on operators’ gross profits (total staked minus winnings paid out) to one based on betting turnover from British racing.

Joe Saumarez Smith, chair of the British Horseracing Authority (BHA), the sport’s governing body, expressed support for a turnover arrangement when he appeared on Racing TV on 30 April. The chairman also floated a rate of “somewhere around 1.5%” when pressed by host Nick Luck on what would be a “realistic” percentage.

Yet it seems bookmakers aren’t exactly enamoured with the prospect of paying the levy on the total amount staked, on top of the 15% gross revenue tax licensed firms stump up on sports betting, including racing, to the Exchequer. Ben Keith, owner of on-course, retail and online bookmaker Star Sports, insists a turnover levy would be a “disaster” and that “more and more customers would move to WhatsApp [bookies]” due to being “knocked back” by operators.

He points to Ireland’s 2% duty on betting turnover to underline his concerns: “Two pence [tax] is a massive handicap. I avoid Irish accounts because if they’ve got half a brain cell and they break even for six months, it’s cost me a fortune,” Keith tells EGR.

You lose, we win

Proponents of a turnover betting levy argue it would guarantee a far more reliable income than the inherent fluctuations of the status quo. “Fundamentally, I think it’s wrong for racing’s finances to be so unstable and unpredictable,” says lifelong racing fan and former Totepool MD Jason Brautigam.

“If you have a turnover-based model you can plan ahead, both in terms of prize money and investment on a much more longer-term basis because you’d have more stability – you see wild fluctuations up and down with the levy income depending on results.”

He adds: “I don’t think it can be good for the sport where the sport wins if its fans lose. I can’t see how a sport can justify how its financial and commercial model that funds the whole sport is predicated on unfavourable results for their customers and them losing money.”

The betting levy, which applies to on- and off-course bookmakers, online firms, pool betting operators, betting exchanges and spread betting companies, represented about 6% of British racing’s total direct income of around £1.47bn in 2022. The Horserace Betting Levy Board (HBLB), the body that collects and distributes levy income, announced in May that it anticipates a levy yield of approximately £99m for the period 1 April 2022 to 31 March 2023, higher than the £90m to £95m that had been forecast previously. For comparison, the yield was £97.6m in 2021-22, a marked increase on the £82m the prior year when there was no racing in the first two months of the levy period, April and May 2020, due to the pandemic.

The last time the government reformed the levy was 2017 when operators based offshore were required to contribute, a move that led to the yield almost doubling from £49.8m in 2016-17 to £94.7m in 2017-18. The levy yield today is still pretty much on par with nearly 20 years ago (£99m in both 2005-06 and 2006-07), although you could argue this is misleading as most of the money from bookmakers going into racing is in the shape of media rights (~11% of British racing’s income in 2022), which have risen consistently over the years and have largely transitioned to a turnover-based system. With that said, a rate of, say, 1% applied to the total amount staked would generate somewhere in the region of £106m annually for the levy, based on the fact UK punters bet £10.6bn on British racing last year.

The last time the levy yield hit the nine-figure mark was the £115.3m generated in 2007-08 when that sum was thought to have been inflated by large losses incurred by high-staking telephone bettors. Furthermore, there are calls for the levy to apply to overseas racing offered by UK-licensed operators, a controversial move but one that could swell the levy yield by a further £15m-£20m per year.

This is another proposal the government will be weighing up as part of the review. But does British racing have a right to claim a slice of UK punters’ losses or the turnover on races run in countries such as Ireland, Hong Kong, France and Australia? Keith says: “Of course they are not entitled to it, but I don’t blame anyone trying it on. There is nothing noble going on here.”

Bookmakers also point out that they already pay for international racing content to the relevant jurisdictions. Sports betting and racing industry veteran Scott Ferguson also questions the notion of enlarging the betting levy’s reach to include racing outside Britain. “How this applies to overseas racing is an odd one,” the native Australian says.

“Normally, this should sit outside the jurisdiction of the levy. After all, it’s not their product and bookmakers already pay for overseas wagering rights. But with prize money in the UK at desperate levels, they have to find something to add to the coffers. Be careful what you wish for, though. If this figure becomes too lucrative, then expect other jurisdictions to put their hand out for more.”

Offers off the table

It’s often said that recreational racing bettors have never had it so good these past few years thanks to juicy inducements dangled by layers: price boosts, free bets, extra places, money-back specials, faller insurance and the almost-obligatory best odds guaranteed (BOG).

Pivoting to the levy model based on turnover is likely to mean many offers could be shelved and overrounds rise. Bookmakers will tell you that the switching of most media rights payments to a turnover model has already led to a reduction in offers and concessions, as well as more restrictions on winning customers. Doing the same with the levy will likely exacerbate it, they argue.

Seb Butterworth, commercial director at Flutter Entertainment, told the Racing Post in May that bookmakers might withdraw spending on promotions and sponsorship in the face of increasing costs. This view is echoed by Virgin Bet sportsbook director James McKay: “Margins would have to change and we would likely witness the withdrawal of most offers. Consequently, the sport would become less appealing to bettors, leading to an overall decline in popularity.”

McKay adds the timing of introducing a turnover-based model would be unfavourable considering the “substantial” rise in data and streaming costs bookmakers are having to absorb. “Operators are already exploring cost-cutting measures due to the exorbitant demands of these suppliers,” he states. “Some operators may even consider not offering these benefits as part of their sportsbooks, even without any levy changes.”

As to the potential knock-on effect on perks like BOG, Keith says: “They would have to go. It’s hard enough to beat a BOG punter who is a guesser anyway. One-and-a-half pence [turnover levy] and BOG – no thanks.”

With a betting levy based on gross profits, bookmakers get accused of using racing as a vehicle to acquire customers for cross-sell purposes. In other words, they run loss-leading offers around the big festivals and then usher these newly acquired players into football betting or online casino. Yet data published by the Gambling Commission shows that online gross gambling yield (GGY) for racing (including overseas racing) was £856m for the period April 2020 to March 2021, up from £654m and £512m the previous two years. Despite GGY slipping year on year to £769m for April 2021 to March 2022, racing still accounts for a third of total GGY of £2.36bn among remote betting operators, behind only football on 46%.

These numbers underline that racing is still an important product and revenue generator for bookmakers. So, is the accusation that racing is often used for cross-sell a fair one? Ed Nicholson, head of Kindred Group Racing and a member of the firm’s UK commercial team, says the majority of racing promotions aren’t directed at customer acquisition.

“Most racing offers are for existing customers, not new customers, especially around festivals. I have been responsible for marketing racing for betting operators for over 30 years and acquisition-based offers are now typically the lowest they have been in terms of monetary value while, simultaneously, retention offers are now more prevalent and more widely available than ever before. Just look at the number of extra-place races that now exist on a daily basis across the bookmaking industry.”

Making up the shortfall

Regardless of the outcome of the levy review, the racing industry is all too aware something needs to be done to make up for the lost income from customer affordability checks the past few years. Martin Cruddace, the chief executive of Arena Racing Company, which operates 16 racecourses in Great Britain, estimated late last year that these checks by bookmakers had resulted in a £40m annual hit to the sport’s revenue.

The DCMS said in the gambling white paper it anticipates the impact of its proposed gambling reform measures – including affordability checks – would mean an £8.4m to £14.9m (0.5% to 1%) fall per year in racing’s income. It also suggested levy yield would slip by £5m to £8m (media rights and sponsorship to fall by up to £6m and £0.9m, respectively), while online horseracing GGY is expected to slump 6% to 11%. This equates to between £46m and £84.5m of the £769m online bookmakers generated in 2021-22 from racing.

However, anecdotal evidence suggests requests for bank statements and proof of income has already driven racing punters to unlicensed options or abandon betting on horses altogether. Similarly with winning customers having restrictions put on their stakes or their accounts closed.

Racing, which contributes more than £4bn to the UK economy and is the country’s second-largest sport in terms of attendance, annual revenue and employment, also isn’t immune to the cost-of-living squeeze on people’s disposable incomes, including betting. It’s a squeeze that has been tightened further by the recent interest rate hikes to combat stubbornly high inflation.

Moreover, the sport itself faces the challenge of making British racing an attractive betting product among casual bettors. As one racing fan put it on Twitter: “Racing needs to find an SGP moment,” a reference to how same game parlays, otherwise known as bet builders, have disrupted football betting.
“Back in the mid-1990s, horseracing turnover typically contributed 75% of the total annual betting turnover for a bookmaker,” Nicholson of Kindred Group explains. “With the relaxation of betting restrictions on football and the explosion and development of sports television channels from the mid-1990s, that figure has reduced as punters widen their betting patterns, and racing now sits at between 25% and 50% of total annual turnover.”

These days, unattractive – or even at times derisory – prize money and a bloated fixture list with too much low-grade racing has sometimes led to uncompetitive action on the turf, compounded by a lack of quality horses partly due to owners sending them to countries like Ireland where the prize money is more appealing. Brautigam says shrinking field sizes and the “feast or famine” nature of the fixture list is “causing the downward spiral in terms of racing’s income”.

“If it moved to a turnover-based model, there could be more focus on racing working in partnership with betting to drive that turnover and get that growth going back up,” he remarks.

Ferguson also backs the switch: “Charging on turnover rather than gross profits makes sense. The industry shouldn’t be in a position where it cheers for the favourites getting beaten at Cheltenham. It should remain neutral to the results and encourage wagering operators to grow the sport. After all, they are the gatekeepers of most of the funding.”

A prime example of the industry ‘cheering’ a favourite getting beat was in 2015 when Annie Power fell at the final flight of the Cheltenham Festival’s Mares’ Hurdle. That dramatic fall saved the bookmakers an estimated £50m, with all the accumulators that day on four hot favourites (the first three won) and boosted the levy yield. It’s a ‘look’ that doesn’t sit right with many associated with the sport.

On the other side of the fence, though, you have the bookmakers who believe a turnover levy is unconscionable and unworkable. Just like Keith of Star Sports, Betfred boss Fred Done recently told Luck’s daily podcast that such a change would be a “disaster” and he referenced how before the abolition of the 9% betting tax (either paid by punters on stakes or winnings) in 2001, illegal bookies would be at the back of his shops offering his customers tax-free bets. Done also warnsed that unlicensed operators are now laying bets from UK punters and that Betfred’s turnover is “massively down, especially on racing”.

This could be for various reasons, including those outlined above, yet the HBLB reported turnover was “notably” down when revealing the expected £99m gross profits levy yield for the latest period.

A “non-binary” decision

For Nicholson, the gross profits versus turnover argument has been debated ad nauseam and the discussion tends to “ebb and flow” based on whether bookmaker profits or turnover are the most attractive at the time. He also argues it is a “complicated, non-binary decision” and that deciding whether it should be based on turnover or gross profits to ensure a larger return to racing is “akin to deciding whether to take an umbrella when leaving the house by just looking up at the sky”.

“A much more sophisticated approach is required – and that will be something the racing ecosystem works towards as this debate continues. Field sizes, times of races, types of races, numbers of races and meetings, terrestrial television coverage, sales of horses to race abroad, amount of time it takes to decide stewards’ enquiries, gaps between races at each meeting need to be taken into account and can contribute positively or negatively to UK racing turnover levels. While how bookmakers market racing to their customers through offers, promotions and what legislative and regulatory factors are in place will have a great say on bookmakers’ gross profit margins and turnover levels,” Nicholson says.

As the review gets underway, the DCMS said in the gambling white paper that the HBLB holds around £29m in funding reserves to help “mitigate any funding gap while levy changes are introduced”. While the levy accounts for just 6% of British racing’s income, with the estimated remainder in 2022 coming from sponsorship (4%), media rights (11%), breeding (22%) and owners (40%), this statutory charge to bookmakers still sparks plenty of debate.
Virgin Bet’s McKay – a critic of a turnover model and the inclusion of overseas racing in the levy – urges collaboration right now: “It is now more crucial than ever to collaborate with the BHA in exploring opportunities to expand the sport and, consequently, increasing their revenues. We, as a collective, are grappling with additional costs and must develop long-term plans to ensure the ongoing success of the sport while avoiding any detrimental effects on it.”
All sides of the industry can probably agree on that.