The Empire Strikes Back

18th February 2013 by

UK DCMS releases draft legislation requiring UK licensing and Treasury to tax UK-facing offshore operators. By David Schollenberger, Partner and Head of Gaming Team at Healys LLP.

On Monday December 3, the UK Department of Media, Culture and Sport (DCMS) released draft legislation which will radically reform the remote gaming landscape. In a two-page amendment to the Gambling Act 2005, it departs from its previous position requiring licensing only of gaming companies setting up business operations in the UK. With the new amendment, all operators selling into the UK, whether based in the UK or offshore, will be required to hold a Gambling Commission licence to be able to transact business with consumers and advertise in Great Britain. This will make such operators subject to the Gambling Act 2005, its regulations, social responsibility and technical standard requirements. The DCMS expects that the legislation will be introduced to Parliament in the third session, which ends in spring 2013.

The DCMS had announced this as its preferred option for the future of remote gambling back in March 2010, and ran a 12-week industry consultation. The government justifies these reforms by noting that the new licensing arrangements will require overseas-based operators to inform the Gambling Commission about suspicious betting patterns involving British customers, and help fight illegal activity and corruption in sportsbetting. It further notes that upon licensing, overseas-based operators would also be required to pay and to contribute to research, education and treatment in relation to British problem gambling and regulatory costs.


Currently, 80 to 90 percent of online gaming and betting in the UK is carried out with companies located offshore, primarily in Alderney, the Isle of Man, Gibraltar and Malta. The mass exodus of UK-based remote operator companies to offshore jurisdictions has been largely self-inflicted by the actions of the UK Treasury. The UK imposes a much higher tax burden on remote gaming businesses than the offshore jurisdictions offer, with a 15 percent gaming tax rate, comparatively high corporate income tax and a 20 percent VAT rate.

The UK has, to date, taken the approach that any company licensed in the EEA (including Gibraltar and Malta) or otherwise on its white list (including Alderney and the Isle of Man), could access the UK market without the need of a UK Gambling Commission licence. The position of government has been consistent with the Treaty of Rome and ECJ decisions requiring free movement of goods and services within the community.

The UK was the first country in Europe to regulate and licence the operation of remote gambling with the 2005 Gambling Act, and it expected other European countries to follow its model for regulation and taxation. Unfortunately, the others did not. Other EU countries, one by one, have adopted protectionist laws requiring point of consumption-based licensing and taxation of remote gaming and betting or continue to reserve gambling to state monopolies, or just outlaw it completely.

The EU has excluded remote gambling from the scope of the Services Directive and the Member States have the ability to regulate remote gambling provided that restrictions are: (1) justified by imperative reasons in the general interest; (2) suitable for achieving the objectives in question; (3) necessary and proportionate and applied in a non-discriminatory manner, as interpreted by ECJ decisions. In recent decisions, the EC and ECJ have signalled that the partial opening of restrictive markets through the introduction of national licensing systems could be implemented by Member States without contravening EC law. This is different to earlier interpretations that mutual recognition was the only way to comply with the Treaty; that is, if a provider is licensed in one Member State, it should be able to offer its services in another without further licensing.

Provisions of the new draft legislation

The Bill proposes to regulate remote gambling on a ‘place of consumption’ rather than a ‘place of supply’ basis. The system will therefore be based on requiring licensing of an operator if the gambling or betting service is made available to British customers, regardless of where the server and software providing the services is located. The actual wording of the amendment simply states that remote operators are subject to the licensing requirements if: “(1) they have at least one piece of remote gambling equipment used in the provision of the facilities situated in Great Britain; or (2) no such equipment is situated in Great Britain but the facilities are capable of being used there.”

So, if an operator offers remote gambling services that are accessible in the UK and it does not wish to obtain a UK licence, it will have to take measures to technically block access to usage of its services by UK customers.

The amendment will repeal the white list for advertising granted to jurisdictions such as Alderney and the Isle of Man and only permit advertising of remote gambling in the UK upon licensing in the UK.

Duplication of regulation and transition

Although it does not appear in the wording of the draft legislation, the DCMS has made assurances in its notes accompanying the draft legislation that the regulation is not designed to require duplication of requirements imposed on operators located in well regulated jurisdictions (presumably such as Alderney and the Isle of Man) and will be “light touch” in those jurisdictions.

It further states that operators in these jurisdictions will not face significant increases in licensing costs. The DCMS indicates that it will provide a transitional period for operators already licensed in EEA and white listed countries who will be awarded an automatic provisional licence so that they will not have to stop trading whilst applying for a UK licence. The length of time of the transitional period has not yet been outlined.

HM Treasury tax proposals

Separately from the draft DCMS legislation, the UK government announced at the Budget 2012 that it was intending to change the current system of gaming taxation to a point of consumption tax. It will replace the existing 15 percent tax on companies licensed with the Gambling Commission in the UK with a 15 percent tax on the income generated on the gross gambling profits generated by UK players regardless of where the gaming operator  is regulated. Draft legislation on this is expected to be introduced in 2013 for implementation in 2014.

The government believes this change is necessary due to the increased popularity of remote gaming, that it is consistent with the approach taken by other European countries and removes the unfair advantage currently given to offshore operators over those based in the UK.

For betting businesses, general betting duty will be charged on a bookmaker’s UK net stake receipts. This will be calculated as the difference between the amount the bookmaker is due in stakes from UK customers and the amount it has paid out in winnings to customers who bet in the UK. For betting exchanges, the exchange commission earned from customers in the UK would be taxed.

For casino games such as roulette and virtual slot machines, the basis for remote gaming duty will be the difference between the amount the operator receives in stakes from customers in the UK and the amount the operator pays out to customers as winnings from those stakes. For poker, the basis of duty will be the amount that is paid by people in the UK as entitlement to use the facilities.

Double taxation

The new proposals will exclude from gambling duties any profits from transactions from non-UK customers. The Treasury believes that this will remove the tax disincentive for operators currently based offshore and encourage operators to return to the UK. The proposals will impose double taxation on operators in jurisdictions where they currently pay gaming duty on a place of supply basis.

In the Finance Bill 2012, the Treasury has granted double taxation relief to UK-based operators where their duties are subject to tax in other jurisdictions that have already implemented a place of consumption tax regime. This will be repealed under the new proposals.

Challenges to proposal

William Hill has challenged the proposals and claims that it is illegal under EU law as an attempt to restrict the free movement of goods and services for tax purposes. Commentators argue that the government is now trying to close the stable door after the horse has already bolted due to the high tax rate it imposed on UK-based remote gaming operators in 2007. It is unlikely that any such challenges will be successful.

Effect on offshore UK-facing remote operators

What will be the effect on remote operators currently based in Alderney, the Isle of Man, Malta and Gibraltar? The most pronounced effect will be caused by the gaming duty tax impact on business-to-consumer licensees.

If an operator’s business is primarily UK facing and it is suddenly facing the same or greater gaming duty taxation remaining offshore, there is less incentive to remain offshore. VAT and other considerations may weigh in any decision to stay or not.

A number of UK-facing B2C operators can be expected to return at least part of their business to the UK. From a regulatory standpoint, the requirement to have both a UK and offshore jurisdiction  licence may not be sufficient incentive to move back, provided that the DCMS’ current intentions for light touch regulation and licence fees for offshore operators is in fact implemented. For B2B operators offshore, there will be less impact on the tax side, since their business transactions are generally outside the UK.

For all offshore licensees, including operators, suppliers and service providers, to the extent they have not already done so, it would be a good time now to re-visit their corporate and tax structures with their advisors. Remote UK-facing gaming businesses will need to find the best way forward through this brave new world of heavy regulation and increasing taxation.