GAMBLERS don’t like paying tax. That makes them no different from most people. But different governments have different ways of making gamblers pay tax.
This is an article by Joe Saumarez Smith that appeared in the April 2001 edition of Business Life, British Airway`s inflight magazine for business class travellers.
GAMBLERS don’t like paying tax. That makes them no different from most people. But different governments have different ways of making gamblers pay tax. In the United States, if you win more than a certain amount of money at big odds, the casino or racetrack will confiscate 30% of your payout and hand it over to the IRS.
Until recently the UK government demanded bettors pay 9% tax on either their stakes or their winnings. This made the Treasury a lot of money but it also meant a huge number of serious gamblers started to take their business overseas. A racecourse bookie called Victor Chandler, backed by some seriously wealthy investors, moved his business to Gibraltar, employed English-speaking operators and offered freephone telephone numbers from the UK and within a year was taking bets worth more than £500 million per year. His tax bill was minimal.
Other bookmakers couldn’t resist copying him. Bookies became the largest employers in Gibraltar as rivals Ladbrokes and Coral Eurobet followed Mr Chandler to the Rock. Malta’s economy received a surprise boost as bookies bought gambling licenses from the tiny island. The Isle of Man and Alderney both found themselves as unexpected centres of the world bookmaking scene.
Unsurprisingly the UK Treasury was rather peeved. Although the average bloke in the betting shop having a couple of quid on the greyhounds at Hall Green was not sneaking off to place a bet offshore, plenty of people who bet £20 a time were. And almost all those placing £100 a time were staking their bets outside the UK.
So, in March last year 2001, the Chancellor announced that he had made a deal with the bookies – he would abolish betting tax on punters’ stakes as long as they agreed to come back to the UK and start paying corporate taxes on betting profits. The bookies had advised that the abolition of the 9% tax would increase UK betting turnover by as much as 40%, thereby ensuring that while the overall tax rate on betting was lower, the Treasury would see more dosh as the amount being taxed would be so much larger.
Behind this deal was, of course, a veiled hint that if they did not agree to this then further more punitive action would be taken against the bookmaking companies, all of whom had directors living in the UK and some of which were floated on the London Stock Exchange.
On October 6 2001 betting tax was abolished and the largest bookies moved their operations back to these shores. It was good news for them as it cut down hugely on employment costs – they had been paying their offshore employees ‘hardship allowances’ for being stuck in such supposedly inhospitable locations – and meant they could re-combine their operations with the betting shop businesses they owned in the UK. And more turnover also meant bigger profits – share prices in bookmaking firms soared on the back of the announcement.
But it was not all good news for the bookies. The abolition of betting tax meant that a large number of clients they had seen very little of before suddenly came out of the woodwork. These were the professional punters who bet in big stakes and were much sharper than your average bettor (in Vegas these people are known as ‘sharps’, as opposed to ‘squares’ who are the average uninformed mug punters).
On October 6 the High Street betting shops started to notice people walking in with large wedges of £50 notes and placing the sort of bets they hadn’t seen before. If a horse was on offer at 2/5, someone might have £2500 on it, to make a profit of £1000. Before this would have been a mad bet. Paying 9% tax on £2,500 would be £225 handed over to the government of your potential £1000 profit. It just didn’t make financial sense. With no betting tax though, the sums started to add up.
The bookies, whose information systems are sometimes positively compared with those of MI5, have had to fight back. Ladbrokes has installed a state-of-the-art bet identification system that sends all bets back to their operations centre in Rayners Lane, west London. More worrying for the professional punters, Ladbrokes has also installed cameras behind their counters that beam pictures of who is placing huge bets back to the centre. If they recognise you as a long-term winner, restrictions will soon be in place. All the other bookies are following the same technological path, albeit rather slower than the market-leading Ladbrokes.
The other bad news for the bookies was the need to increase turnover by 40%. If someone told you that your firm – already operating in a relatively mature marketplace – would have to increase business by those levels, you’d be worried. If you were told that the whole marketplace was going to have to grow by 40%, you’d be forgiven for thinking it was impossible.
The professional punters obviously helped grow turnover but always at the expense of margins. Some of the margin increases have come from everyday punters increasing their stakes because they are not having to pay the tax. But, according to my sources in the betting firms, it still looks like in the first year, the overall turnover figures will come in somewhere between 25% and 30% up. Some experts put it as low as a 20% increase.
To say the Treasury will be displeased by this is a serious understatement. A contact of mine there believes that if there is a serious shortfall in betting duty after a year, tax on bets will be reintroduced sharpish. For once, the bookies have been put in the position of becoming gamblers. Either they start taking more bets from people who might actually beat them or the government might take away the greatest tax concession in the history of UK gambling. It’s a dilemma they are struggling to resolve.