Levy Reform

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

On 1 September, the Government issued its second consultation this summer on the horserace betting levy. The first one - which closed on 21 August - related to the proposed extension of levy liability to gambling operators located overseas (our commentary on which is here). This new consultation concerns a more general proposed modernisation of the funding of horseracing by gambling operators.

The background

The horserace betting levy was first established by the Betting Levy Act 1961 and substantially reformulated under the Betting Gaming and Lotteries Act 1963 (the 1963 Act). In more recent years, proposals for modernisation of the levy have had a troubled history.

The Government was given power to abolish the levy under the Horserace Betting and Olympic Lottery Act 2004. It was intended that the funding of horseracing would instead be sustained by commercial agreements based on the database right in runners and riders data. That had to be abandoned following the decision of the European Court of Justice in BHB v William Hill Case C-203/02 [2005] RPC 260. Following that decision and the report prepared by Lord Donoughue and his panel of luminaries on the levy in 2005, the levy was given a reprieve by means of the Gambling Act 2005 (Horserace Betting Levy) Order 2007. This preserved provisions of the 1963 Act which were otherwise repealed by the Gambling Act 2005 (the 2005 Act).

Then in 2011, John Penrose MP, the then Minister at DCMS with responsibility for horseracing and gambling policy, issued a "pre-consultation" soliciting views on three potential options for reform of the levy: simply removing the Secretary of State from the levy process; compulsory agreements between the racing industry and betting operators; or the establishment of a horseracing betting right. That "pre-consultation" led nowhere.

The latest consultation

The consultation document for the latest consultation states that any future levy arrangement must be fair, sustainable, enforceable, legally sound and (perhaps most importantly from the Government's perspective) remove Government from the process. But then it expressly seeks to rule out three options.

First, the Government does not want to leave the levy as it is. The document says that the status quo "is not a desired option as there are too many issues with the system as it stands that need to be addressed".

Second, the document rules out abolishing the levy altogether. It claims that there is a "continuing need for a statutory framework to underpin arrangements enabling a flow of funding from betting on British horseracing back into the sport for the mutual benefit of both racing and betting" so that "all those who benefit from betting on the horseracing "product" contribute and that there are no free-riders".

Third, there will be no general betting right which would benefit other sports (and possibly other events) on which bets are taken. It states: "The Government has no plans to create a model that would apply to all sports." As to why horseracing should be uniquely privileged in this way, the document merely states: "Betting and horseracing have a unique interdependent relationship that has shaped both for over 200 years - one which is not mirrored in the relationship between betting and other sports..." The greyhound racing industry in particular might question this.

The document then does propose two options.

The first is reform of the levy but leaving it broadly as it is, that is in effect a tax for which the obligation to pay arises in the legislation. The second option is for the levy to be replaced by what the document describes as a "rights model", where betting operators would require a licence from racing to take bets on British horseracing.

Levy reform

As regards levy reform, the document asks a series of questions concerning the structure of the current arrangements such as whether the levy scheme should be specifically set in statute (as it is in France), the composition of the Levy Board and the Bookmakers' Committee and the duration of and timing of levy schemes.

The document also expresses the desire on the part of Government that the Secretary of State will no longer be the fall-back option to determine the terms of a levy scheme where there is no agreement between the Levy Board and the Bookmakers' Committee. But how levy schemes should be determined in such circumstances remains a fundamental problem. The document refers to the possibility of "independent arbitration" but that raises more issues such as whether the arbitrator should be someone with a deep understanding of racing and/or betting - which risks accusations of bias - or someone entirely outside both arenas - which risks accusations of not having the necessary knowledge.

And then there is the question of who appoints the arbitrator. Plainly the Secretary of State does not want even that limited role. The document suggests this could fall to the Levy Board. But that hardly seems calculated to give the appearance of fairness when the arbitrator is to determine a dispute between the Board itself and the Bookmakers' Committee.

An interesting question the document asks is whether the level of levy should be assessed by reference to "a concept of the "value" of British horseracing to punters" as opposed to the rather vague principles in play at present such as the "needs of racing" and bookmakers' "capacity to pay". Such a change would be consistent with seeking to put levy arrangements on a more quasi commercial basis with the levy amount assessed on the supposed commercial value of horseracing to punters.

But the difficulty here is knowing what "value to punters" really means. The Copyright Tribunal is adept at assessing the commercial value of collectively administered intellectual property rights, but there is no obvious existing near parallel in the UK for assessing the value of the use of sports data in betting. This would be venturing into very uncertain territory.

The document also asks about audit rights and data collection. The current levy arrangements are extremely deficient when it comes to the ability of the Levy Board to audit bookmakers and if the levy is to remain, the provisions regarding the ability of the Board to gather information certainly need to be reformed. The suggestion that in addition there be a requirement on gambling operators to provide data more generally so as to perfect levy arrangements in the future is more unusual, but unlikely to meet significant objections provided the data are subject to proper aggregation and anonymisation.

Conspicuous by its absence in the discussion of levy reform is any reference as to who should pay the levy. The current definition of "bookmaker" in the Betting, Gaming and Lotteries Act 1963 - the key term for who pays - is extremely antiquated. Last year, the Court of Appeal in R (on app William Hill) v Levy Board held[1] that it did not include operators who used betting exchanges even if they are acting in the course of business and profiting commercially from horseracing in the same way as traditional bookmakers. Curiously, the earlier consultation on extending the levy to overseas operators did ask whether it was appropriate to revisit the definition of bookmakers. That would appear to be a centrally relevant question for this consultation as well.

The "rights model"

The consideration of the so-called "rights model" alternative seems less well developed. The document offers two means of achieving this.

First, there could be a regulatory obligation that gambling operators obtain authority from racing to take bets on British horseracing. Such a regulatory obligation may not be entirely straight forward.

The 2005 Act includes at section 1 the licensing objectives which govern generally the terms on which the Gambling Commission can issue licences. Also, section 79 sets out specifically the permitted scope of conditions which the Commission can apply to operators' licences. But it is not at all clear whether these provisions taken together would extend to permitting the Commission to require operators to obtain authority from racing to take bets on British horseracing.

The licensing objectives and the permitted scope of conditions under the 2005 Act could be amended, but that seems a major step to achieve these ends. Or more simply, the Commission could be given specific statutory permission to provide for a licence condition that operators obtain the appropriate authority from racing. But on any of these approaches, the Commission in effect becomes the enforcer of these funding arrangements for the benefit of a single sport, a role it has not previously been asked to do.

Second, there could be a pure rights-based approach, in effect introducing a new intellectual property right in relation to taking bets on British horseracing. One immediate issue arising in respect of such an approach is that it might be problematic to seek to enforce those rights on overseas operators in the courts of their own jurisdiction, where the right may not be recognised. Judgment from a UK court may be sought, but even if obtained, it may be difficult to enforce if the gambling operator has no assets in the UK.

More generally, it is not at all clear how such rights-based arrangements would operate. Plainly it is envisaged that under either approach there would be - at least initially - a negotiation between the bookmakers and the deemed rightsholder. The deemed rightsholder would probably be the British Horseracing Authority (the BHA) but it could perhaps include the racecourses or even the owners.

As for the bookmakers, it is not clear whether the negotiation would be a collective endeavour or whether operators would each undertake a separate negotiation with the deemed rightsholder. If the latter, would it then be possible for some bookmakers to be able to secure more favourable terms than other operators? Indeed, would it be possible for one bookmaker to obtain an exclusive right (not quite so far-fetched when one thinks that is precisely what happens typically with the negotiation of media rights for sporting events)?

And then what would happen if, as seems likely, these negotiations prove unsuccessful? The terms would surely have to be determined by an independent body. That body would, one suspects, have to be appointed by Government, be knowledgeable of the industry and reflect both sides but be beholden to neither. In other words, it would inevitably look a lot like the Levy Board.

An alternative would be to refer to the matter to the Copyright Tribunal. However, as noted above, such a right is dissimilar from existing intellectual property rights and assessing the value would be outside the current comfort zone of the Tribunal. Moreover, it cannot be expected to have a thorough-going knowledge of the industry, which many would think essential for this arbitral role.[2]

State aid

The document hardly refers to the essential legal issue which has dogged the question of levy reform for many years. That is the concern that the levy constitutes unlawful state aid under European law. So far, this concern has been limited since the levy pre-dates the accession of the UK to the EU. However, any significant modification would mean that EU state aid law would be applied with full force.

The Government may have been fortified in its confidence that it could obtain state aid clearance because the French equivalent levy obtained such clearance last year (our commentary on the clearance is here). But this confidence may be misplaced since essential to the reasoning of the European Commission was that the levy was part and parcel of a general liberalisation of gambling in France. The same simply does not apply to the proposed levy reform here.

So the Government is venturing into turbid waters with these proposals. The issues which have derailed previous attempts to reform the levy would still seem to apply and the consultation document does not seem to chart an easy way through them. The consultation responses should be very interesting. But we would not expect the Government to be able to proceed to significant reform in the near future.

The consultation closes on 5 November 2014.

Dan Tench is a partner in the Litigation Department at Olswang LLP

[1] Olswang acted for the claimant

[2] For an interesting and useful discussion of "sports organisers' rights", see the European Commission sponsored report by the Asser Institute "Study on sports organisers' rights in the European Union