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United Kingdom Online Gambling Tax Hit Coming for Gibraltar-based Firms

ukflagThe United Kingdom’s wide-open online gambling market might receive a facelift next year, the result of recently enacted tax code changes that will make offshore firms serving British citizens subject to the same tax rates already paid by domestic operators.

Several firms based in Gibraltar — based there exactly for those tax-shelter purposes — are among those who will fall under the reach of the new code if they wish to continue serving British punters.  While the UK’s domestic operators have paid 15% of gross profit, the Gibraltar sites have gotten away essentially tax-free, paying at most 1%, with a cap on the amount due set at £425,000 (roughly $700,000).

The new code, set to go into effect in 2014, will affect such “British” online firms as Ladbrokes, William Hill, Betfair and, all of which fly the corporate flag of Gibraltar at present.

Government officials estimate that if the offshore firms comply, the new levy will return £300 million ($467 million) to the UK’s tax revenue base.

The rationale behind the British move should be familiar to online gamblers: In an online-gambling world, players should be taxed based upon their place of residence, not where the firm itself is located.

While such a stance is arguable, it’s also very much the reality, and in a natural outgrowth of the increased balkanization by countries around the world that allow online gambling as long as they can derive tax proceeds from it.  Those changes were approved in theory in 2012, with the new changes representing the implementation of the new code in future budget years.

The same “residence of player for tax purposes” argument is being tossed about in the United States, where various states are considering the prospect of interstate gambling compacts as the state’s themselves look to increase the future liquidity of state-authorized poker sites.

The UK has released a 56-page draft of the proposed changes, which actually won’t become official until some time next year, when the government’s 2014 budget is approved.  The actual tax would go into effect in December of 2014.  This paragraph best sums up the rationale for the changes:

A place of consumption approach supports the Government’s objective of a fairer tax system. Currently, remote gambling operators can and do avoid UK gambling taxes by supplying from abroad. The reform will level the playing field in terms of UK gambling tax liability and provide a fairer basis for competition between remote gambling operators supplying the UK market from the UK and from overseas. The reforms will also help improve the sustainability of the UK’s tax base by ensuring that remote gambling, alongside other gambling products, makes a fair contribution to UK tax receipts. The reform will bring additional public revenues from operators based abroad who supply remote gambling to the UK.

In anticipation of implementing these changes, HMRC (Her Majesty’s Revenue & Customs) officials met with 40 industry representatives throughout 2012, determining that two key areas were the focus — properly defining a “UK person,” and establishing sufficient enforcement mechanisms to ensure compliance from any possible recalcitrant offshore operators.

The former is relatively easy to determine in most purposes, and the latter will be dealt with via an escalating scale of fines, revocation of the ROL (Remote Operating License), and possible criminal charges against company executives.

According to the Economic Secretary to the Treasury, Sajid Javid, “It is unacceptable that gambling companies can avoid UK taxes by moving offshore, and the government is taking decisive action to ensure this can no longer happen.  These reforms will ensure that remote-gambling operators who have UK customers make a fair contribution to the public finances.”

To few onlookers’ surprise, most of the Gibraltar-based firms are gearing up for a legal challenge via the European Union.  This NY Times piece reports that several of the Gibraltar-based firms are planning to pool legal resources for such a challenge.  As Ladbrokes’ Gibraltar operation head, Steve Buchanan, told the NYT, the new levy would place “a huge and unwanted cost on our business.”

It’s likely that this will be another losing battle for the Gibraltar firms, should they choose to engage.  The European Union has made vague noises for years about enforcing EU-wide agreements that online-gambling services are among the eligible cross-border services, yet has remained powerless as country after EU member country has electronically walled off their own citizens from online gambling or has established restrictions or operational tax rates such as that now on the way for the UK.

With that history, it’s hard to see how the Laddies and Bill Hills of the world come out on top, when the reality of the situation is that any time one of these companies’ UK-based gambling shops can convince or convert a walk-in customer to bet online, the company itself just saved 14% or more in tax assessments.  That’s the inequity that the new British change seeks to address, and despite the noise from the sites themselves, it’s going to go into effect in some form late next year.


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