Post-Budget Special: A point of consumption gambling duty regime is due to arrive in December 2014. But will it?

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

As predicted in our pre-Budget special, the Government yesterday announced plans to introduce a point of consumption ("POC") gambling duty regime and stated that this "is planned to be introduced in December 2014", which is later than some commentators had suggested.

As stated in our previous note, the Government also plans to introduce an amended regulatory framework (which will require remote gambling operators, wherever they are based, to hold a Gambling Commission licence in order to advertise, and provide services, to British customers) at the same time as the new POC gambling duty comes into force. These changes to the regulatory regime will require primary legislation. However, as we indicated, we do not see this as necessarily plain sailing for the Government and our view has been somewhat reinforced by the European Commission's letter, published earlier this week, commenting on the most recent draft of the gambling rules proposed by 15 of the 16 German states.

The draft law proposed by all German states apart from Schleswig-Holstein stated that neither online poker nor online casino games could be offered legally in Germany. The 15 states sought to justify this ban by saying that "in light of the fact that such games are highly vulnerable to rigging and have significant addiction potential, as well as the fact that they are vulnerable to being exploited for the purposes of money laundering, it does not appear to be justifiable to open up the internet as a distribution channel".

In its letter, the European Commission commented that the objective of combating criminal and fraudulent activities linked to gambling is one of the public interest reasons capable of justifying restrictions to the freedom to provide services under EU law, but notes that "no data has been provided to adduce evidence of the existence of the risks identified. In this context, the Commission services would like to reiterate that the suitability and proportionality of the measures in question needs to be established to the requisite standard. In the context of the assessment of whether such a standard is met, it would need to be determined whether, first, criminal and fraudulent activities linked to gambling and, second, gambling addiction are significant problems in Germany and whether the ban of certain types of games or gambling on the internet is capable of solving such problems."

Applying that reasoning to the proposed new UK licensing regime would suggest that it may not be sufficient for the Government merely to assert that the new licensing regime is required to protect British consumers gambling with offshore sites, but that they may also have to provide evidence of the harm suffered by British consumers justifying what may be regarded as an obstacle to the freedom to provide services. As we indicated yesterday, the Government has, to date, not produced any such evidence but perhaps will attempt to use the Full Tilt affair to assist their case in some way?

As expected, the Chancellor also announced the introduction of Machine Games Duty ("MGD"), a new "gross profits tax" for machines which is to replace the existing Amusement Machine Licence Duty and VAT (gaming machines will now be moved within the VAT exemption for gambling). The new duty will be introduced on 1 February 2013. The rate of MGD, however, at 20%, was not as expected. Notwithstanding that the Government had stated that "the introduction of MGD is not intended to raise additional revenue", the rate is higher than companies were expecting and many analysts have suggested that this will result in material increased costs for both Ladbrokes and William Hill.

The manner of the introduction of MGD demonstrates something of a trend. The Treasury tends to consult on the mechanics of proposed new gambling duties quite extensively over a material period of time (which is to be applauded) but delays the announcement of the rate until closer to the date on which the new duty is to be introduced. This was also the case when remote gaming duty was introduced in September 2007, to coincide with the coming into force of the Gambling Act 2005. Then, as with MGD now, a lower rate was hoped for and then, as now, the Chancellor disappointed.

As we suggested in our pre-Budget note, it would seem reasonably likely that some members of the remote gambling industry will argue that the POC tax should be introduced on a twin rate basis. If the trend referred to above continues, the machinery of the new tax will be consulted on with draft legislation being published well in advance (we have heard that the Treasury plans to publish draft legislation later this year), but the rate or rates will be withheld until shortly before the new tax is introduced. As well as lobbying for a low rate of duty, operators who don't wish to see the introduction of this new tax, may well seek to construct legal arguments as to why either the new tax or the new regulatory regime is unlawful in an attempt to block (or at least delay) the introduction of the legislation.

For further information, please contact Stephen Hignett or David Zeffman.