What the New UK Legislation Will Mean for Online Poker What the New UK Legislation Will Mean for Online Poker
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The new Bill proposed by the UK’s Department of Culture, Media and Sport is a four clause text that amends the existing 2005 Gambling Act. Its effect is simple in that it requires all operators offering online gambling to UK residents to acquire a license from the UK Gambling Commission.

The 2005 Act led to almost all affected companies leaving the country since the Act allowed them to offer their services from outside the UK without getting a UK licence. Thus they were able to avoid a 15% tax on profits that licensees were required to pay. The new bill closes this loophole.

Creation of .co.uk Sites, UK-Based Subsidiaries

All companies that want to accept British customers and advertise in Britain must obtain a license, and all bets taken with this license are subject to a 15% gaming tax levied on all gross profits.

It is likely that sites will set up UK subsidiaries similarly to the way they have done in response to the legislation in Denmark.

There are several reasons why this may happen but in particular it will make it legally easier to establish a different rake structure or VIP benefits system for customers of the .co.uk site.

EU rules don’t allow companies to set different prices for services based on the nationality or location of the customer. The result will likely be special UK sites, such as pokerstars.co.uk, specifically serving UK customers.

International Player Pools Remain

However, there is currently no indication that the player pool must be segregated; the UK subsidiaries will act as a skin on an international network. So PokerStars.co.uk, PartyPoker.co.uk etc will connect to their dot.com servers, much like the situation in Denmark, Belgium and Estonia.

Operators will then pay the gaming tax on rake attributed to players from the UK.

Likelihood and Timeline

This bill, which makes 4 simple amendments to existing legislation, is very likely to pass when it is voted on in early 2013. The coalition government has the majority in the House of Commons, and this bill may receive support from opposition too.

There will then be a one year transitional period, where companies can continue to operate and will receive temporary licenses. This gives time for applications to be submitted and approved. During this period, companies may accumulate back-tax which would have to be paid before the system goes officially live in early 2014.

Smooth Transition

Online poker players in the UK should suffer no real disruption to their play.

Firstly, all sites currently operating in white-listed jurisdictions—which includes Malta, Gibraltar, Isle of Man and Alderney—will be awarded provisional licences, specifically so they do not have to cease operation while applying.

With few licensing restrictions, all major operators can be expected to obtain licenses. Servers do not need to be based in the UK. Unlike in Belgium, which only permits established brick and mortar casinos to apply, there is no such stipulations in the UK. When Denmark rolled out its regulatory system in the UK, forty operators applied for licenses and all major poker rooms and networks are live in Denmark.

Players on smaller skins on networks like iPoker, Microgaming and Ongame may need to shift to larger skins, but otherwise the transition should be very smooth.

Increased Costs to Operators

There are three additional costs to operators: licensing and compliance costs, gambling duty, and UK corporation tax.

The annual licensing fees are relatively minor, and, according to the latest draft bill, operators already in “well-regulated jurisdictions” that can provide the necessary compliance information “... will not face significant increases in licensing costs.”

If gambling duty is maintained at 15%, however, it is a significant extra burden. There is some chance that the 15% tax rate is reduced. The DCMS themselves released a report recently that argued a Point of Consumption (POC) tax at 15% would force 40% of operators out of the market.

The Treasury is expected to announce a bill shortly which will complement the DCMS bill. The Treasury bill is expected to announce a change to a POC tax system which will ameliorate the impact of the DCMS bill. It is possible that the 15% rate will be reduced in this bill, perhaps to 10%.

The only UK poker company which remained after the 2005 Act was implemented was Bet365. The change to a POC tax will mean that Bet365 will immediately cease paying Gaming Duty on its overseas customers. The purpose of this change is to encourage gaming companies to start up in or relocate back to the UK.

Finally, any new UK subsidiaries will be subject to UK corporation tax on their profits. Currently levied at 23% for 2013, this additional cost would make a major difference to online poker providers’ cost base unless it can be minimized.

This tax liability can often be reduced, if not to zero, then as close to zero as possible, through various tax schemes. One is for the parent company to charge the subsidiary for services: A PokerStars UK subsidiary, for example, will not own the software or PokerStars brand name, so the Isle of Man based parent company can charge a substantial price for their use. One contemporary example is Starbucks, which uses this to effectively reduce their tax on UK profits to just 1%.

Public outrage at such low effective corporation tax rates means that the UK Government is exploring options to close these loopholes. Although such moves are well in the future, they could potentially increase online poker providers’ costs which might then be passed on to the players.

Increased Costs to Players

This increased cost to operate will, at least partially, be passed down to players.

In separate sites like Spain, France and Italy, some online poker rooms have increased the rake to subsidize the increased operational costs.

However, as UK sites will be in the international player pools, it is not really feasible to charge a variable rake rate depending on the location of the player. For that reason, UK players will likely see a reduction in their rewards.

How that Compares

A 15% gross profits tax means operators first discount player bonuses, rakeback and rewards; if a site returns 25%-30% of total rake collected back to players, a 15% tax on gross profits is equivalent to 10-12% of gross gaming revenue.

This sets it lower than most other regulated countries. Spain, France, Italy and Denmark are all 20% or higher. Estonia is lower, at 5%. The UK’s corporation tax rate is also one of the lowest in Europe.

The most comparable is Belgium, where poker rooms are taxed 11% on gaming revenue, and because Belgium is also in the international player pool, it should offer a pretty close comparison to what .co.uk sites will be like.

On PokerStars.be, VPPs accumulate about 5% slower than on PokerStars.com (for example, the multiplier rate is 5.25 on dollar tables, instead of 5.5 on the international site). Stellar rewards are also reduced by about 5%. However, FPP multipliers and cash bonuses are all at the same rate.

Based on this, we can expect UK players to receive possibly 10% less in total rewards.

No Change to an Individual’s Tax Liability on Winnings

It’s worth clarifying that these changes in no way affect the tax exemption for a player’s gambling winnings under the UK tax code.