Changes are afoot in the UK gambling industry, but what do the taxation changes mean and how will it affect the big online gambling firms?
The gambling industry is one of the losers in the great debate over how much tax multinational companies are paying to target customers in the UK. From 1st December 2014, gambling operators trading in the UK will face a new 15% tax on profits.
There are three new duties being levied at the end of the year, but the one that is most likely to impact the online industry is a rule change for the Remote Gaming Duty. Essentially the change applies the tax on a place of consumption basis, meaning that gambling companies who operate from outside of the UK will now have to pay a 15% tax on all of their profits generated by UK customers.
The new rules will affect:
• The remote gambling industry which offers remote betting and gaming to UK consumers from outside the UK
• UK land-based betting business such as high street betting shops
Whereas previously the law meant that tax on gambling revenues was collected by the country in which the operator was registered, the new law means that the UK government can collect tax on all transactions taking place on desktop and mobile gambling in the UK as it is the place of consumption.
The existing (current, but soon to be reformed in December 2014) tax law was seen to be incentivising companies such as William Hill, Betfair, Bwin and Ladbrokes to operate their online operations off shore from places like Gibraltar.
Economic Secretary to the Treasury, Sajid Javid, said of the change: “These reforms will ensure that remote gambling operators who have UK customers make a fair contribution to the public finances.”
With an estimated global yield of £21.08bn (a number which is growing at 5% a year) generated from remote gambling operators, it’s no surprise that the government wants to claim some tax from the £2 billion spent by UK residents. Expectations are that the new measures will bring another £300m a year into the UK treasury.
The media spotlight has been on the taxes paid by companies who are able to use the internet to generate customers recently, so much so that even cornerstone dot coms such as Google have been under scrutiny for generating huge advertising revenue from UK businesses but operating their sales and fulfillment operation from Ireland.
The debate is very much of the times as the internet has very quickly become a reliable commerce channel and governments have been slow to adapt to the changing conditions of business. However, it’s such a complicated issue that the government has only managed to reach a parliamentary consensus on changing rules for gambling industry.
Despite the numbers adding up on paper, the real driving force behind the law change is an accompanying social policy which aims to funnel the tax revenue generated into support services for gambling addiction.
Remote gambling operators targeting the UK are obviously going to be hit hard as their taxes just shot up from 1% in Gibraltar to 15% with this shift to taxing gambling on a place of consumption basis. A KPMG report recommended a lower rate of 10% warning that the plan may backfire and put some remote gambling operators out of business and driving the industry underground which will, in turn, jeopardize the government’s fiscal and social objectives.
Sky News reports that William Hill, which operates the largest share of the market, may consider challenging the changes on the grounds that it may breach EU competition law, but in general there has not been any major counter attack from gambling operators.
Instead, gambling operators are simply preparing their operations to endure this new major cost center. According to the Financial Times, William Hill has slashed operating costs by £15 to £20m to adapt to prepare for the change and Ladbrokes expect to close between 40 and 50 stores across the UK.
What Does All This Mean for Paid Search?
Following our previous coverage of the UK gambling industry on the Adthena blog, we intend to watch the paid search market very closely as a 15% tax on gross profits for gambling operators could have a real impact on the shape of the market.
Predictably, we are likely to see some fluctuation in cost per clicks but there are some other factors at play. For one, as we have described before, a solidly profitable PPC strategy can lead to a winner-takes-all market so there is some risk that remote gambling operators who thrive on PPC ads, arbitrage and affiliates could be hit the hardest.
Also, although the tax is considered a gross profits tax, that is actually too simplistic a definition. There are some nuances to the law change which ultimately could eliminate traditional gambling incentives such as a free bet. This means PPC managers may have to change their marketing strategy across the board, testing out new call to actions.
Furthermore, pressure to test new ad formats will also come from how every competitor adapts to the change. While there is an assumption that the remote gambling operators will absorb the 15% additional tax cost, there is no guarantee that will happen. Some, facing the risk of going under, will endeavour to pass some of the cost on to the customer. Competing operators will need to be hawk eyed and watching each others incentives to see how the market responds to bearing the burden of additional fees.
Whatever happens, checks and balances will need to be sought by the industry at large as passing too much of the tax burden to the customer will alienate “high-rollers” – like the guy on June 29th, who bet £146,000 on Costa Rica to defeat Greece in 90 minutes of the FIFA World Cup 2014. If those industry VIPs face the cost of a 15% tax on their winnings passed on to them, then they may take their money elsewhere.
All of which is going to profoundly shape the paid search landscape in 2015.