When the chips are down ………
Government today announced it is to reform the treatment of freeplays for UK Remote Gaming Duty (“RGD”) purposes. Effective 1 August 2017, the tax base for RGD will be widened to include the full value of free or discounted plays provided to customers who are UK resident. It will apply to online bingo, poker, casino games and slots. This will align RGD to General Betting Duty where the value of free and discounted bets has always been included within the duty calculation.
Treasury estimate that by 2019 this will generate an extra £100m per year in RGD revenues.
Today’s announcement has come as somewhat of a shock to industry with no advance warning. It should also be noted that there has been no mention of any consultation and it is likely that provision will be included within Finance Act 2016 (expected to be published 23 March 2016) and draft legislation released later this year in FA 2017 following the Chancellor’s Autumn Statement.
Not only will this create another significant cost for industry it could fundamentally change the business model of a typical eGaming operator where it is not uncommon for promotions and free plays to account for upwards of 20% of the value of GGR. Operators providing sports book have already been required to make changes to the way in which they offer promotions to customers following the introduction of the point of consumption tax last year, with a transition away from free bets to enhanced odds as companies seek to optimise marketing and promotional spend in an increasingly competitive market.
There also appears little chance of any challenge to the legality of Government’s intended change to the legislation. Existing legislation already provides for such a change and Government is not bound by wider EU rules and regulations in respect of gaming duties.
It would be interesting to see whether Treasury’s estimation of £100m additional tax revenues stands up under more detailed scrutiny. £100m in additional tax revenues suggests that the value of losing spins / plays to UK customers amounts to more than £650,000,000. Although I am not an expert in this field, and not having data to hand, this does seem an extremely large amount. Treasury have also caveated their policy estimation conceding that there is “uncertainty” in the costing calculation with regards to the size of the tax base and behavioural responses. These would appear to be two fairly key elements. In addition, given that the reforms are not scheduled to take effect until August 2017 I am not sure how the Exchequer could see a loss in revenues of c£20m in the tax year to 5 April 2017!!!
Could this be seen as another example of Government seeing the industry as a cash cow for tax revenues without fully understanding the business model or the way in which the sector operates? Or, for the more cynical amongst us, is this a way for Government to tax advertising and promotions as an alternative to extending the VAT rules relating to where such services are used and enjoyed. You may recall that whilst this was raised in Budget 2015, no further announcement has been forthcoming. Has Government found that it ticks the “too difficult” box and decided on RGD reform instead?
Whatever the rationale the reform will create a significant cost to operators. The industry is still adjusting to the impact of the point of consumption tax changes introduced last year and it does not go unnoticed that a number of major operators have recently announced significant downturns in profits and even posted losses
for the first time in years. Clearly this stifles investment. Whilst Government may suggest that this does not impact the UK (due to the offshore location of eGaming operators), there are many operators who have activities and interests in the UK and there is the knock on effect of reducing revenues to key service providers located in the UK, many of whom are contracted under revenue share agreements.
There is clearly a lot for industry to consider over the course of the next 16 months. Marketing and promotional strategies will need to be reviewed and reworked; business forecasts updated; and consideration given to the effect on revenue share arrangements going forward.
It will be interesting to see what effect this has on the eGaming industry. Will we see certain operators finding the UK market too expensive? Could this provide a trigger point for additional consolidation within the sector?
On a separate but similarly depressing note eGaming operators with sports book activities may also be affected by the planned revisions to the Horserace Betting Levy. These will see the levy extended to remote betting operators located outside of the UK.
Taxing times indeed!
Gavin West Director