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Online gamblers could turn to unregulated markets if Government plans to tax betting operators on the basis of where bets are placed are introduced, a report commissioned by a leading betting operator has said.

Placing a 10% 'point of consumption' (POC) tax rate on remote gambling could result in up to 27% of online consumer bets being placed in unregulated markets unless effective enforcement measures are found that restrict the growth of that market, accountancy firm Deloitte said in a study for William Hill seen by Out-Law.com.

If the POC tax level is set at 15% as many as 40% of punters could turn to unregulated markets, the study said. The POC tax could also result in the UK online betting market getting smaller because it would likely lead to smaller companies exiting the market and others cutting back on their marketing expenditure, it said.

Deloitte was investigating the impact a POC tax would have on the UK's remote gambling industry.

"A POC tax, even at low levels, would be likely to encourage consumers to move into an unlicensed, untaxed grey market," the study said.

"Under a reasonable set of assumptions, and in the absence of effective enforcement procedures, a 5% POC tax would distort competition leading as much as 13% of the UK online gambling consumer revenues moving into the grey market. Up to 27% of business could move into the grey market at a 10% POC tax rate," it said.

In July John Penrose, the minister responsible for gambling, announced plans to require all betting operators to obtain a licence from the UK's Gambling Commission in order to take bets placed from UK consumers, regardless of where the operators themselves are based. Economic Secretary to the Treasury Justine Greening subsequently announced that the Government would draw up plans to levy a POC tax on betting operators on remote transactions placed by UK consumers.

Under the Gambling Act foreign companies must currently be licensed in certain 'white-listed' jurisdictions in order to operate within the UK. At the moment, any gambling operator which wants to offer its services in the UK must be licensed or regulated by one of the states approved by the Gambling Commission, the Government regulator of commercial gambling in the UK. Licenses issued in these 'white listed' countries are treated as having been issued in the UK. However, offshore operators do not require a licence in order legally to take transactions from UK consumers.

Under the UK's current tax regime UK-based betting operators pay a 15% tax based on gross profits on bets, but many high street bookmakers, including Ladbrokes and William Hill, have moved their online operations abroad where they are not currently liable for a tax on profits earned. Separately, UK bookmakers must also currently pay 10.75% levy on gross profits taken on horse racing bets.

Penrose said that it was "unfair" that overseas-based operators could take bets from within the UK "without bearing a fair share of the costs of regulation" or of the treatment of problem gambling.

If the Government does go ahead with its POC licensing plans it should initially introduce the remote betting tax at a level less than 10% in order to minimise the risk of promoting unregulated markets, the Deloitte study said. Such a level would also give the Government time to develop "effective enforcement mechanisms to limit the ability of grey market operators to target UK consumers," it said.

Other countries where online betting takes place use a number of enforcement measures to ensure regulation of the market place with "mixed" results, the study said. Those measures included using technology to block consumer access to illegal or unlicensed websites, preventing banks from transferring funds to specific sites, finding directors of gambling operators criminally liable for prohibited activities and either totally banning or reducing the scope of advertising for online gambling.

With weaker betting operators likely to close and others reduce their marketing costs as a result of a POC tax being imposed on them, the effectiveness of enforcement measures are key to the success of preventing an unregulated betting market from establishing itself, Deloitte's study said.

"The extent to which a grey market emerges as a result of these market exits depends critically on the effectiveness of the enforcement regime. While it is currently unclear what controls the Government would introduce alongside the POC tax, the international evidence suggests that there would be significant practical challenges involved in such enforcement, particularly under higher tax rates," the study said.

The UK online gambling market is estimated to be worth £1.7 billion in net revenues.

Copyright © 2012, OUT-LAW.com

OUT-LAW.COM is part of international law firm Pinsent Masons.

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