Levy to go (again)?

United Kingdom

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

In February (see here) we reported on the determination of the 50th Levy Scheme by the Secretary of State, Jeremy Hunt. In doing so, he became the latest Minister to express his frustration at having to get involved in what he regarded as a commercial relationship between the horseracing and betting industries. Indeed, both industries, at different times, have called for the Levy to be replaced. However, as we described in our update last September (see here), the Government and the betting and horseracing industries have been talking about replacing the Levy since the end of the last millennium and all of these attempts have so far failed.

Heralding Government's next attempt, the Gambling Minister, John Penrose, has written to the leading horseracing and gambling bodies launching what he has called a "pre-consultation exercise" with the objective of developing potential solutions. In his letter, he outlines three options:-

Option 1

Retaining the Levy system, but removing the Secretary of State from his role in setting the Levy when agreement cannot be reached between Racing and Betting.

Option 2

Abolishing the Levy, replacing it with a commercial agreement reached between Racing and Betting - enforced by a condition to be incorporated in bookmakers' Gambling Commission operating licences.

Option 3

Abolishing the Levy, replacing it with a so-called "Horserace Betting Right". This is a variation of the sports betting right which has been advocated by a number of sports governing bodies across Europe, such that it would be an infringement of this right for bookmakers to take bets on British horseracing without a licence being in place with the rightsholder.

Mr Penrose has asked for written submissions by Monday 13 June 2011.

Each of these options has its advantages and disadvantages, some of which are listed in Mr Penrose's letter but we would highlight the following:-

Offshore: One of the main reasons for the decline in the Levy has been because many bookmakers have moved their online businesses outside of the UK and therefore outside of the jurisdiction of the Levy. None of the three options canvassed by Mr Penrose will be effective unless they extend also to these offshore operations. This is something on which the previous Government issued a consultation in March 2010, but the present Government has made no announcement in relation to that consultation. In his letter, Mr Penrose states "I hope to announce the Government's response to the [offshore] consultation shortly and so without inviting further discussion of that issue I would be grateful if you could consider the extent to which your responses depend on the solution to the remote issue". In our view, it will be difficult for consultees to respond properly to the three options without knowing what the Government's plans are for offshore remote betting and, if Mr Penrose is going to make an announcement soon on this, it might have been more sensible to defer this pre-consultation until then. (The Culture, Media and Sport Select Committee inquiry into the implementation and operation of the Gambling Act specifically asks for comment on "the impact of the proliferation of off-shore online gambling operators on the UK gambling sector").

VAT: The Levy is not subject to VAT, whereas either of Options 2 and 3 would require bookmakers to pay VAT in addition to the licence fee. VAT is largely irrecoverable by bookmakers and they would, no doubt, be expecting Racing to bear some of this additional VAT cost. Indeed, the way in which gambling machines (including Fixed Odds Betting Terminals) are taxed is due to change in 2012/13 and this is likely to increase significantly the amount of bookmakers' irrecoverable VAT.

Criteria: One of the problems which has beset the Levy is the absence from the legislation of any criteria which should be used in determining the amount of the Levy (albeit that the original Levy legislation did include the somewhat vague notions of "the funding needs of racing" and "the bookmakers' capacity to pay"). The arbitration-type mechanisms which would need to be in place for Options 1 and 3 (and possibly also for Option 2) would have to set out the criteria by which any independent arbiter or tribunal could decide the appropriate amount to be paid.

Primary legislation: Whilst the Government retains its power under the Horserace Betting and Olympic Lotteries Act 2004 to abolish the Levy, the replacement mechanisms envisaged by Options 2 and 3 would require primary legislation and there must be a doubt as to the priority which levy reform would command in the legislative timetable.

Betting exchanges: In his letter, Mr Penrose mentions creating a level playing field between betting exchanges and traditional bookmakers. This is something on which we have reported before and in particular on the consultation which the Levy Board issued in July of last year. As is clear from the latest documentation published on the Levy Board's website, this issue remains as yet unresolved and may be tested in the Courts.

Sports betting right: As mentioned above, the "Horserace Betting Right" is a manifestation of the "Sports Betting Right" and, were the Government to pursue Option 3, there would undoubtedly be significant pressure from other sports governing bodies to introduce an equivalent right for their own sports. The counter-argument would be that horseracing and betting have a unique symbiotic relationship but the same could certainly be said about greyhound racing.

Whilst the Government's willingness to re-open this intractable issue is to be welcomed, there must remain considerable doubt as to whether the Levy will ultimately be replaced. Mr Penrose makes clear in his letter that he will not abolish the Levy without having a suitable replacement and, in our view, this is only likely to be achieved if the racing and betting industries can get together to agree and propose to Government a joint solution. If, instead, the Government seeks to impose a solution without the agreement of either Betting or Racing, then the bookmaking industry has shown in the past that it would be prepared to resort to litigation to challenge the proposed new scheme and European state aid and competition law rules would be the likely basis for any challenge. Indeed, the recent variation to the French equivalent of the Levy scheme is currently being investigated by the European Commission.