The UK government launched a consultation paper in April which proposed changing the taxation system for online gaming. The deadline for responses to the proposals is June 28.
“Only in Estonia is there no increased cost to play. Its 5% tax on gross gaming revenue should be an indication of where the bar should be set to ensure online poker players are not adversely affected by regulation.” The paper proposes a 15% tax on operators for all bets accepted for people in the United Kingdom—a tax based on the location of the bettor at the time the bet is placed (“point of consumption”). Currently, tax is based on the location of the operator—and most operators are based offshore.
Under the Gambling Act 2005, all operators in the UK must hold a license under the United Kingdom Gambling Commission (UKGC) and pay 15% tax on “gross profits” (defined as the total number of bets placed minus the winnings paid out). But there is no requirement that sites hold a UKGC license: Any site with a remote gaming license can legally accept bets from UK residents.
Furthermore, operators in approved remote jurisdictions—called the “whitelist”—are allowed to advertise online gaming to UK residents. This list includes all jurisdictions in the European Economic Area as well as seven offshore additions including the Isle of Man, Alderney and Gibraltar. With much lower operator taxation in many of these jurisdictions, there’s little incentive for sites to be regulated under the UK system.
The Government estimates that only 10% of online gaming by UK consumers generates tax revenue under the existing scheme. Although over 100 operators do hold UKGC licenses, many of these are UK-focused bingo and lotto sites. Very few poker rooms are regulated in the UK. The consultation paper proposes scrapping the whitelist and making a UKGC license mandatory to those who wish to accept bets from UK customers.
What Poker Players Can Expect from a 15% Operator Tax
Although the proposal pertains to all online gambling, there are a couple of paragraphs that mention poker specifically. Paragraph 3.20 states that “for person to person games, such as poker, the basis of remote gaming duty will be the amount that is paid by people in the UK as entitlement to use facilities.”
It continues: “For example, where a payment is made to a provider of facilities from a centrally held ‘pot’, the provider of facilities will be liable to duty on the proportion of the payment due from customers in the UK. Where a payment is made from an individual player (e.g. the winning player) the provider will be liable to duty if that player is in the UK.”
In other words, for games like poker the tax is taken directly out of the rake or tournament entry fee paid minus player bonuses and rewards: That is, the tax is on gaming revenues, not on the sites’ profits. Assuming a 25% return on rakeback and bonuses, this UK “gross profits” tax will be roughly equivilent to 75% of the standard gross-gaming revenue taxation: 15% gross profits will be somewhere around 11-12% in terms of total gaming revenue.
This pitches it lower than regulated online poker in France, Spain, Italy, and Denmark, but is higher than recent regulation in Estonia and Belgium and would be a sizable burden to operators—a burden that will at least partially be passed onto players.
To take one example, bwin.party's annual accounts show poker revenues of €187.5m in 2011 and earnings (EBITDA) of €26.1m—an accounting profit margin of just under 14%. A 15% gross profits tax would make them struggle to turn a profit on UK play.
According to language in the policy document, the new levy is expected to have little impact on the consumer. The paper explicitly states: “The impact on individuals and households is expected to be negligible as this measure is not expected to have a significant impact on the availability, price and payouts of remote gambling.”
This example of bwin.party is an oversimplification, but it does indicate that the true impact will not be negligible. “There is nothing in the UK proposal to suggest that the player pools must be segregated from international pools, so a reduction in rewards rather than an increase in rake can be expected.” To counterbalance the increased costs to operate, rake will need to be increased or player rewards reduced.
An Example from Europe
The clearest indication of this is the family of regulated PokerStars poker rooms. On all sites with an operator taxation of 11% or higher, there has been some increased costs to players. In segregated player pools—Spain, France and Italy—the rake is higher than on the dot.com site in both cash and tournament games.
In regulated countries without a segregated player pool and thus unfeasible to raise rake—Belgium and Denmark—player rewards have been reduced. Notably, Belgium’s taxation is lower than that proposed under the new UK system.
Only in Estonia is there no increased cost to play. Its 5% tax on gross gaming revenue should be an indication of where the bar should be set to ensure online poker players are not adversely affected by regulation.
There is nothing in the UK proposal to suggest that the player pools must be segregated from international pools, so a reduction in rewards rather than an increase in rake can be expected. The Belgian VIP club is probably a starting-point for what a PokerStars rewards system on pokerstars.co.uk might look like under the new proposals.
Benefits of Regulation
Of course, it would be wrong to ignore the benefits to players and operators for pragmatic regulation and taxation of online gambling. There is an epidemic of failures in online poker operators and most offshore jurisdictions do nothing to protect players.
Jurisdictions on the UK whitelist demonstrate over and over again an apparent lack of concern for player concerns, from the AGCC doing nothing to prevent the financial failings of Full Tilt to the Maltese LGA failing repeatedly to aid players in ongoing disputes.
But then state regulation is hardly a silver bullet: The French gambling authority ARJEL issued a license to Full Tilt when it was already in financial distress, and French players are out of pocket just like their US and European counterparts.
The UKGC states explicitly that they do not require operators to segregate player funds. It does state however that licensees have legal obligations to their customers and, under the Gambling Act 2005, “gambling debts became legally enforceable.”
There are a lot of other areas of concern such as barriers to innovation and the intrusive nature of the surveillance measures that sites will be expected to adopt. The issues we have raised here are only a few of those that the proposed legislation must address. Pokerfuse strongly encourages players and the industry to submit their responses to this consultation paper before the deadline expires on June 28.
Correction: The article has been updated to clarify the existing system of “gross profits” taxation and the differences with a taxation on gross gaming revenue.
