This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.
Last week, on the morning when the High Court began hearing the application by the British Horseracing Authority (BHA) and William Hill for a judicial review of the Levy Board's decision regarding betting exchanges ( see here for further background on this), the BHA and Betfair announced a surprise commercial agreement which led to the BHA withdrawing from the judicial review.
According to their press releases, British Racing and Betfair have entered into a five year commercial agreement under which Betfair has agreed to pay British Racing 10.75% of all its revenues from bets on British racing placed by its UK customers and contains guaranteed minimum payments amounting to £40m over the five year period.
In return, the BHA has given commitments to ensure a minimum number of fixtures per year and the press releases state that "Betfair's betting data will be used to help construct a fixture list that will optimise British Racing's attractiveness as a betting product for punters, the racing industry and betting operators".
The payment of 10.75% of Betfair's revenues replicates the percentage of the betting exchange's revenues agreed to be paid under the 51st Levy Scheme (1 April 2012 to 31 March 2013) (see here) and these payments will be offset against each other.
The deal has been heralded by both Betfair and British Racing as a model for the arrangement that could be adopted to replace the Levy, which has been undergoing its latest review since May 2011 (see here) with the Government expected to consult later this year on its proposals to reform or replace the Levy.
The obligation of Betfair to make payments based on the commission it receives from bets placed by its UK customers is also consistent with the proposed new "place of consumption" basis for charging betting duty (see here) although that is not intended to be implemented until at least December 2014.
It is perhaps worth considering the motivation of the parties in agreeing this deal.
From Betfair's perspective, it has had no statutory obligation to pay the Levy since its move to Gibraltar in March 2011. Nevertheless, it has taken the position, since its move offshore, that it should continue to pay the Levy in relation to its UK customers, first by way of a voluntary contribution to the Levy and then, in the 51st scheme, by way of a binding agreement.
By confirming this position for five years (under, we assume, a binding agreement), Betfair will get positive PR (and indeed Betfair's press release contains praise from John Penrose, the Gambling Minister, for entering into this deal) and also gain influence over British Racing's fixtures policy.
From Racing's perspective, we can see the following benefits:
(i) Racing obtains (what we assume to be) a binding commitment to receive at least £40m over the next five years (Betfair having undertaken to pay £6.5m under the 51st Levy Scheme);
(ii) It establishes a model framework for a commercial Levy replacement. Whereas all of Betfair's business is online and offshore, the big retail bookmaking chains have their betting shops in the UK - which remain subject to the Levy - but locate their online businesses offshore, outside the Levy's remit. The Betfair deal will perhaps exert some pressure on these bookmakers to pay the Levy (or its commercial equivalent) for the UK customers of their online businesses.
However, it is assumed that Racing will not wish to rely on a wholly commercial replacement for the Levy unless it has some statutory underpinning requiring bookmakers who wish to transact with UK punters to enter into a commercial agreement with Racing and, depending on how such a statutory foundation is implemented, the Government may well face a legal challenge. In that connection, it was announced earlier this week that Matthew Hancock's Private Member's Bill for the introduction of both betting duty and Levy on a "place of consumption" basis is expected to have its second reading on 25 January 2013.
(iii) In withdrawing from the judicial review, Racing is no longer in an antagonistic position with Betfair, which is a significant sponsor of British Racing, but nevertheless will benefit from the outcome of the judicial review should William Hill be successful. Note: Olswang represented William Hill (and the BHA prior to its withdrawal) in this action.
One other issue, not addressed in the press releases, is whether any VAT is payable under the agreement and, if so, whether that is included within Betfair's payments or would be additional.