Levy reform, the Government enters the final furlong

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

On Saturday, the UK Government announced its proposals regarding reform of the horserace betting levy, providing broadly for a flat 10% levy on all operators on their gross win above £500,000. The Government is planning that the new regime will come into effect with considerable urgency, by April 2017 - that is when without these changes the next levy scheme would have commenced.

Does this finally mark the end of years of debate – but no action – on reforming the levy? In our view the proposals remain problematic.

We have recorded many times (for example, see here, here, here, here and here) the long and troubled history of proposals to reform the levy. The current announcement follows a consultation (the "2016 Consultation") in March of last year which considered extending the levy to overseas bookmakers who take bets on British Racing.

The announcement on Saturday was very short and stated simply that the levy would be:

• extended to any gambling operator that takes bets from "British-based consumers"* (the 2016 Consultation did not expressly suggest that the levy would be restricted to British customers) on races held in this country**;
• assessed at 10% of gross profits from Racing above £500,000 (and presumably limited to profits made in respect of "British-based consumers" on British Racing) – it seems that the rate applies equally to on-course and off course bookmakers (whereas currently racecourse bookmakers pay a flat rate of £240 and the Tote pays no levy in respect of its racecourse operations);
• "enforced via a reformed statutory Horserace Betting Levy" and enacted by a statutory instrument; and
• introduced in April 2017 and the rate reviewed within seven years "to ensure it reflects any future changes in the market”. Given that the levy is currently reviewed every year and this is a highly dynamic area (and Brexit may make it even more so) seven years seems a long time.

The announcement also stated that in early 2018, the Government intends to transfer responsibility for collecting the levy to the Gambling Commission, with the Levy Board being wound up. This is to be achieved, it is said, by a Legislative Reform Order made under the Legislative and Regulatory Reform Act 2006.

These proposals remain problematic for the following reasons.

State aid

Article 107 of the Treaty on the Functioning of the European Union ("TFEU") prohibits - subject to certain exceptions - state aid, that is aid granted by the state (which would include - as here - the hypothecation of revenue raised from a levy) which is granted selectively to certain undertakings, which distorts or threatens to distort competition and which affects trade between Member States.

The Government appears to accept that its levy proposals would constitute state aid. The question therefore is whether they fall within any exception and in particular the exception which allows aid:

“to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest.”

The Government asserts it does, principally on the basis that the European Commission considered the French levy system did come within this exception.

The challenge to the French levy by the EGBA and RGA at the Court of Justice of the European Union (the "CJEU") failed for procedural reasons. But the reasoning of the Commission decision is not easy to follow and there appear to be good grounds to question it.

In any event that does not necessarily mean that the Government’s proposals are secure because there are major differences between the respective British and French levies.

• In the French levy decision, the Commission appears to have had significant regard to the fact that the French levy was part of a set of liberalising measures to open up the French gambling market. That does not apply at all to the proposed British levy.
• Racing in Great Britain currently benefits from very substantial media rights and other income. That alone calls into question the appropriateness of the new proposed levy.
• The British levy would extend to overseas bookmakers and there are serious questions as to whether the levy is compatible with the right to the free provision of services under TFEU (see below). The French levy does not extend to operators outside France.
• The proposed levy would (for the first time) apply equally to on-course and off-course operators but on-course operators already contribute to Racing for example through rents and commissions (indeed the levy was originally introduced in the 1960s - when off-course bookmaking was liberalised - precisely to reflect the fact that off-course operators would not otherwise make a contribution to Racing in the same way that on-course bookmakers did). There is clear European law authority to say that:

"different situations must not be treated in the same way unless such treatment can be objectively justified” (Case C-106/83 Sermide [1984] ECR 4209).

In this case, on-course and off-course operators are arguably in different situations when it comes to their contributions to Racing (absent the levy) but they would now be required to pay levy precisely on the same basis. And there is no obvious objective justification for this.

In the announcement, the Government indicated that it is still awaiting state aid approval for its proposals from the Commission (and there appear to be some new facts regarding the proposals for the Commission to consider). For the reasons stated above, that approval may not be forthcoming and even if it were to be granted, it may be subject to challenge.

Vires

In the announcement, in terms of the current proposals, the Government states simply that it will enact them by means of "secondary legislation". In the 2016 Consultation, it stated more explicitly that the "necessary legislative changes will be made by secondary legislation using powers in section 2 of the Gambling (Licensing and Advertising) Act 2014".

However, that provision is limited to securing that "the levy … is payable [by all] bookmakers who are required to hold a remote operating licence…”, that is to extend the levy to overseas operators. But the proposals appear to go beyond that in prescribing a rate and applying it equally to on-course and off-course bookmakers. The statutory basis for implementing these provisions - whether under section 2 or otherwise - is not at all clear.

In addition, in terms of the future proposal to abolish the Levy Board and transfer the levy collection duties to the Gambling Commission, this, it is said, will be achieved by a "Legislative Reform Order" or "LRO". LROs can be made under section 1 of the Legislative and Regulatory Reform Act 2006.

However, section 1(2) provides that an LRO can be made only for the "purpose [of] removing or reducing any burden … resulting directly or indirectly for any person from any legislation". It is not clear why simply transferring the levy collection role reduces any such burden for anyone. The Government may argue that a one stop shop for gambling regulation and levy collection creates savings for operators, but that argument requires careful factual justification. Also section 5 states that an LRO "may not make provision to impose, abolish or vary any tax". The change to the collection body for the levy may well be seen as a variation of a tax.

There is also a question as to whether it is legitimate for the Gambling Commission to take on the role of levy collector. The powers of the Commission are set out in the Gambling Act 2005. The principal duty of the Commission (section 22) is to promote the licensing objectives, which are (section 1) preventing gambling from being a source of crime or disorder, being associated with crime or disorder or being used to support crime; ensuring that gambling is conducted in a fair and open way, and protecting children and other vulnerable persons from being harmed or exploited by gambling.

It is not at all clear how any of this allows the collection of levy. It is equally not at all clear how an LRO could be used to amend these provisions. And in any event, even if the legal basis did exist to confer these collection powers on the Commission, is it right for tax collection and regulation to be undertaken by the same entity?

So for these reasons, it is questionable whether these changes can be effected under an LRO.

Free movement

Under Article 56 TFEU restrictions on the freedom to provide services between Member States are prohibited unless they meet a legitimate purpose. In the judicial review brought by the Gibraltar Betting and Gaming Association (represented by Olswang) against the UK Government over the latter’s proposals to extend betting and gaming duty to overseas gambling operators the question arose whether those duties constituted restrictions for the purposes of Article 56 and if so whether they were legitimate.

Those questions have now been referred to the CJEU on the basis that it is at least arguable that they do constitute restrictions and they are not legitimate (the opinion of the Advocate General in the reference in that case to the CJEU is expected later this week). A similar analysis arises in respect of the imposition of the levy on overseas bookmakers.

In the 2016 Consultation, the Government identified two (somewhat overlapping) purposes for the extension of the levy. First to “create a level playing field” and second to “ensure a fair return from all gambling operators to Racing” and “to restore to Racing a fair contribution from all operators”. Neither of these constitutes a recognised justification for a restriction under Article 56. Moreover, given the other funding available to Racing from the sale of media rights, there is also a question as to whether the levy is proportionate, as would also be required.

Timing

The proposal to have the new system in place by the start of April seems extremely tight. That is 77 days from the announcement.

Under the Statutory Instruments Act 1946, where (as here) a statutory instrument is subject to the negative procedure, it must (under section 5) be laid before Parliament for a period of 40 days. But the Government is not in any position to fire the starting gun on this period.

Firstly, it does not yet have the state aid approval from the Commission (and as stated above, there may be the need to apprise the Commission of some more details regarding the proposals which have only just become clear).

Secondly, it would not appear to have provided the necessary information generally for consideration of the proposals to start. There is no published legislation (although we assume this will be produced shortly) and also the Government has failed to publish the report it commissioned from Frontier Economics into the industry and as referred to in the 2016 Consultation.

There are two Parliamentary Committees that can consider the merits of statutory instruments proposed by Ministers: the Secondary Legislation Scrutiny Committee in the House of Lords; and the Joint Committee on Statutory Instruments. Either of these can investigate the merits of particular pieces of secondary legislation and can engage with Ministers if they have concerns.

Given the uncertainty and controversy surrounding the proposals, there must be a fair chance that one or both of the Committees will have grave concerns about them. If so, any ensuing delay may well take us beyond 1 April. In that situation, the existing levy arrangements will continue pro tem (in December the Minister announced that if the current levy structure were to continue the current levy scheme would just rollover into next year). Changing the levy mid-scheme may be considered too complicated so in that eventuality, we may have to wait at least until next year for the proposals to come into effect.

Moreover, if the proposals were to be implemented on the Government’s timetable and then there were to be a successful legal challenge, that might leave Racing particularly vulnerable. Plainly, if the challenge was successful, it would almost certainly be impossible to extract levy under the new proposed arrangements (which would have been declared invalid). However, in that circumstance, it is far from clear whether the existing arrangements, which would have been ostensibly abolished, would be considered to come back into life. That would potentially leave no levy and Racing facing a substantial shortfall.

So yet again, the Government's proposals do not entirely stack up and there appears plenty of scope for those adversely affected to challenge them.

Will it be good for Racing?

Whilst Racing is understandably celebrating the Minister's announcement, it does not necessarily follow that the proposed extension of the levy, if it does actually come into effect, will benefit Racing in the long term. Indeed, this further addition to the ever increasing cost of the racing product for bookmakers may well accelerate the steady decline in Racing's share of the betting pound. When one also takes into account the threat to betting shops posed by the Triennial Review; the current absence of televised racing in Ladbrokes, Coral and Betfred betting shops; the rift with the major high street bookmakers caused by the ABP scheme; and the use of racing as a low margin loss-leading product by the online bookmakers, Racing's celebrations may well be short-lived.

*The definition for "British-based consumers" is not set out and may in itself be problematic. The Finance Act 2014 has a definition (in the context of extending betting and gaming duties to overseas operators) of a "UK person" and the Gambling (Licensing and Advertising) Act 2014 extends gambling regulation to operators where "no [remote gambling equipment] is situated in Great Britain but the facilities are used there". Whether either of these tests or a third test is to be used is at present unclear.

**By this country, we assume they mean Great Britain, i.e. England, Wales and Scotland but not Northern Ireland, consistent with current levy arrangements, but this is not made clear