The introduction by Customs in 2001 of gross profits tax for betting has been a success in encouraging the biggest bookmaking firms to retain their core operations in the UK. The challenge now for Customs is to address the new risks to duty revenue posed by the use of new forms of gambling such as betting exchanges, increasingly available through advances in technology.
According to today’s report to Parliament by head of the National Audit Office Sir John Bourn, the gambling industry has changed significantly since the Public Accounts Committee’s last report, in 2000, on gambling duties. In addition to the introduction of gross profits tax – whereby, rather than punters having to pay tax on their stakes or winnings, traders pay tax on their gross profits (stakes less winnings) for betting, pools and bingo – the industry has developed new electronic gambling methods and products.
Customs has implemented most of the recommendations made by the Public Accounts Committee in 2000 and has work in progress on the remainder. In doing so it has secured additional revenue of £10 million by, for example, recovering arrears of amusement machine licence duty and it has reduced significantly illegal betting. Today’s report recommends that, to implement the Committee’s recommendations in full, Customs needs to complete the work underway to estimate the ‘tax gap’ for general betting duty, including internet betting, and extend this work to other gambling duties to enable better targeting of resources to tackle the potential losses of revenue.
The gross profits tax, introduced in October 2001 to general betting duty, has protected duty revenue by encouraging bookmaking firms to bring their telephone and internet businesses back to the UK and retain their core operations here. The initial fall in revenue from general betting duty, from £487 million in 2000-01 to £383 million in 2003-04 was in line with Customs’ estimates when making the change and it is likely the fall would have been higher under the old regime.
Customs underestimated the popularity of new gambling products with low profit margins such as betting exchanges. Consequently, the duty revenue rate has been much lower than expected (down from 6.7 per cent in 1999-00 to 1.2 per cent in 2003-04 as a percentage of bets placed), even though spending on betting has been higher than expected in terms of value of bets placed. Customs extended gross profits tax to pools betting in April 2002, causing duty revenue to halve, and to bingo in October 2003.
Customs has reduced the resources allocated to gambling duty work: from 41 staff years in 1999-2000 to 26 in 2003-04. Despite this reduction, Customs has improved its risk assessment and compliance work, especially with the recent creation of dedicated national teams, one for the 11 largest traders and two covering medium and small size traders. For example, detailed risk analyses have now been developed for each of the largest traders, and in 2003-04 for the first time inspector visits to small and medium size traders were determined in large part by the outcome of a comprehensive risk model.
However, Customs needs to make better use of the information it obtains on traders from visits and other contacts, as well as using external research and random sample audits, to improve further their risk assessments and targeting of resources. Also, Customs should make more use of penalties to encourage traders to pay the full duty they owe on time.
The gambling industry’s use of electronic technology to develop new forms of gambling poses new risks to revenue. Betting exchanges, interactive TV gambling, mobile phone gambling, spread betting and internet gaming have all emerged in recent years. Customs will require more IT expertise to carry out compliance work on these activities. Customs has made some progress in understanding the new products, and has investigated many e-gaming sites. It now needs to refine its risk assessment to take account of these new products as well as any changes arising from the proposed Gambling Bill. With the creation of the new HM Revenue and Customs department and the proposed Gambling Commission, Customs should also take advantage of opportunities to pool expertise and resources and share information on traders.