The Horserace Betting Levy: the saga continues

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

The Horserace Betting Levy has been in existence for 55 years and for almost the last 20 years the Government and Racing have been talking about its abolition and what, if anything, should replace it. There is manifestly no obvious solution which is satisfactory to Government, Racing and the betting industry whilst also being compatible with EU law.

In the latest chapter, in an answer today to a Parliamentary question (after being heavily trailed in the media), the Secretary of State, John Whittingdale, stated "that our aim is to introduce a new funding arrangement for British Racing by April 2017. We will create a level playing field for British based and offshore gambling operators and ensure a fair return from all bookmakers to racing, including those based offshore. Racing will be responsible for making decisions on spending the new fund and we will be making further announcements shortly."

To explain the whole history of the Levy would require a tome rivalling the length of War and Peace (but somewhat less gripping) and instead you can read (here) and (here) our most recent notes on the topic.

Probably the best refresher is the Parliamentary debate which preceded the introduction into the Gambling (Licensing and Advertising) Act 2014 of a power for the Government to extend the ambit of the Levy to bookmakers based outside of Great Britain. In that debate, the then Gambling Minister, Helen Grant, said in March 2014:

"We remain firmly of the view that the need for genuine Levy reform cannot be satisfied through extension to offshore remote bookmakers alone. That is why this amendment is part of a wider Levy reform package, which was announced by the Chancellor a week ago in the Budget. We will now move forward very quickly on to concurrent pieces of work.

We will seek to complete all the necessary extension work in time for the 2015 negotiations on the 55th Levy Scheme, and … will begin consultation on the wider Levy reform this summer. We hope to complete that consultation by the autumn. We want to get on with this, but it must be done properly, and there are a number of practical considerations that prevent us from doing it any earlier. … any significant change beyond extension would require primary legislation."

“We are [consulting and liaising with the European Union] because the Levy is existing state aid and the rules require that any change that is substantive – and this is substantive – must be notified to the Commission. Discussions have already begun and we are already trying to establish whether any precedent has been set in relation to the ruling on the French Levy last year.”

Following that debate, the Government issued three consultations (in June 2014, September 2014 and February 2015) all related to levy reform. The last of these consultations discussed the mechanics of a horserace betting right as the mechanism to replace the levy. That consultation closed on 12 March 2015 and DCMS has never published the results of that exercise. Nevertheless, only 6 days later, in the Budget, the Chancellor of the Exchequer, George Osborne, announced that the Government would bring forward legislative proposals to introduce the horserace betting right. However, no such proposals have been made and, from yesterday's brief answer by the Secretary of State it seems that the horserace betting right now joins the pile of discarded proposed levy replacement mechanisms.

What happens next?

What the Secretary of State said is very light on detail and it could be that for the third Budget in a row the Chancellor will be addressing the levy.

What is clear is that whatever form the new arrangement takes will need the approval of the European Commission as State aid.

Any notification of a new State aid measure will trigger a preliminary investigation by the European Commission. From the time it has received a completed notification, the European Commission has two months to decide whether the aid is compatible with EU State aid rules or whether there are serious doubts as to its compatibility. If such serious doubts exist, the European Commission will open an in-depth investigation. Member States and interested third parties have one month from the date of publication to submit comments. There is no legal deadline to complete an in-depth investigation and its actual length depends on many factors, including the complexity of the case, the quality of the information provided and the level of cooperation from the Member State concerned. The European Commission’s final decision is subject to review by the European courts. Any investigation or challenge is likely also to call into question the existing levy scheme.

In terms of state aid approval, the BHA in its press release welcoming the development says that it is confident that the European Commission's approval will be forthcoming given its approval in 2013 of the French para-fiscal levy in 2013. Our note on that European Commission decision is here. However, that decision is itself being challenged by the European Gaming & Betting Association and the Remote Gambling Association.

The BHA has hailed yesterday's announcement as "paving the way for a brighter future" for racing and a "significant and historic" development. The BHA will, of course, have had discussions with DCMS about the detail of what the Government is proposing but, based on what Mr Whittingdale said yesterday and the fate of previous levy replacement proposals, it may be premature to start running the closing credits.

Even assuming that the new scheme passes muster with the European Commission and is not successfully challenged, there is still the central question of what constitutes "a fair return". In yesterday's Parliamentary session, Philip Davies MP asked whether media rights income would be taken into account in determining the amount of the new levy. The Secretary of State answered that "the amount will be determined by an analysis we have commissioned into the funding and costs of racing and this will take account of all sources of revenue including media rights".

This in itself is somewhat curious since it suggests responsibility on the part of the Secretary of State for determining the total levy amount. Hitherto, this has been not primarily a matter for him but for the Levy Board and the Bookmakers’ Committee (albeit with the decision reverting to him when the Board and the Committee cannot agree). In the future, the mechanism for determining the amount raised and the levy rates and the extent to which these can be challenged will be crucial. A key factor in this will be the weight attached to Racing’s media rights income whose growth has far outstripped the decline in levy yield. (For my personal views on this topic please see here).

If the levy replacement scheme generates a yield which Racing considers fair, that will inevitably result in the betting industry paying more for the racing product than is currently the case. But will that be a good thing for Racing in the longer term? The more expensive racing is for bookmakers, the greater their incentive to promote higher margin products such as football, golf, tennis, roulette, slots, etc. More and more betting is moving away from land-based outlets to online and mobile and Racing's share of the latter market is already smaller than in betting shops and continuing to decrease.

Indeed, Racing is currently testing the bookmakers' appetite for paying more for racing through its Authorised Betting Partners (ABP) scheme. Under this scheme, Racing has taken concerted action in refusing to sell sponsorship and to supply other benefits (such as appearance on racing TV channels or racecourse Wi-Fi) and charging more for streaming rights to those bookmakers who do not agree to make a quasi-levy contribution in respect of their online business. It is not surprising that none of the big retail (land-based) bookmakers have signed up as ABPs as they are the ones who currently bear the overwhelming majority of the levy through their betting shops. Coral, for example, has said that it would make a contribution in respect of its remote business if the rate of levy on betting shops was reduced but their offer was rejected by Racing. Racing clearly believes that it is too important a part of the bookmakers' product range and that the big bookmaker chains cannot afford to let their APB online competitors gain greater racing market share through the benefits that ABP status gives them. Maybe Cheltenham in two weeks' time will be a good test of that proposition?

All parties will now wait impatiently for the detail of the Government’s proposals and in particular whether they will constitute a proper levy replacement, or whether they will simply be another chapter in the protracted saga of failed levy reform.