UK Point of Consumption Tax referral: the Heart of Justice?

By Paul Leyland, Founding Partner, Regulus Partners

“Knowledge without Justice ought to be called cunning rather than wisdom.” Plato

The British High Court has ruled that UK Point of Consumption Tax law was sufficiently controversial with regard to EU law that it needed to be referred to the Court of Justice of the European Union (CJEU) for an ultimate decision as to its legality.

According to Olswang, the law firm representing the Gibraltar Betting and Gaming Association (GBGA), there were three key points that the Judge had issue with:

1.       Whether a restriction on the provision of services from Gibraltar to the United Kingdom engages the right to free movement protected by Article 56 TFEU. Mr Justice Charles held that this was an issue of constitutional importance.

2.       Whether the taxes payable under the new tax regime constitute restrictions on the right to the free movement of services for the purposes of Article 56 TFEU. HMRC had argued that in order for a tax measure to be a restriction for the purposes of Article 56 TFEU it is necessary for it to be discriminatory. Mr Justice Charles held that in this regard HMRC had relied on a principle of law which has no clear precedent in European law.

3.       Whether the aims relied on by the UK Government to justify the new tax regime are legitimate. The reasons given by the UK Government for the new tax regime included addressing a perceived competitive advantage for overseas operators and increasing UK tax revenue.

Each of these was cogently argued on behalf of the plaintiff and each clearly makes logical sense.

The CJEU must now find the time to consider then decide whether this part of the 2014 Finance Act is indeed lawful, needs minor tweaks or sends UK government back to the drawing board. In the latter case the proceeds of the current tax will need to be refunded.

This process is likely to take several months for the CJEU to find the time and several more months to consider evidence and deliberate. In the meantime operators must continue to pay the tax.

So far so good for the off-shore remote gambling industry?

I’m not so sure.

Mr Justice Charles, has in my (thoroughly lay) opinion (safely) stuck to points of law and ‘kicked the problem upstairs’ from a constitutional / policy perspective. This is not the same as a judgement that the tax is unlawful and the decision should not be taken as that. Moreover, the track record of the CJEU in gambling and in other fields is that it is quite happy to consider law within the context of wider policy (especially where free trade ‘needs’ to be qualified, with gambling a fairly uncontroversial case in point): indeed as the highest court in the EU it has to.

Looking through the lens of wider policy, is it likely that a vital organ of the EU state is going to find in favour of tax havens and offshore commercial businesses over the tax raising powers of its larger Member States? I think not (certainly not without plenty of get-out clauses in the judgement for which the court is famous). Equally, even if the CJEU does rule in favour of GBGA, is it likely that EU and Member State governments will meekly acquiesce to such a decision and accept the new world order? Of course not… Instead they will be forced back to the drawing board to achieve their ends through different means (possibly with added anti-sector sentiment and belligerence). From a UK-specific perspective, the EU treaty negotiations provide a further mechanism for the EU to ‘help’ UK with a relatively marginal concession in the scheme of things.

So here is the conundrum…

In my view, the best thing the offshore gambling industry can now hope for is that the CJEU finds for HMRC. Otherwise, Member States, including the UK, will have to think up new gambling laws from first principles in order to ensure an ‘adequate’ level of tax and regulatory oversight (according to their own criteria). Opening up that can of worms is not likely to end with the benign, gently regulated and low-tax regime that the UK currently enjoys.

This is a fight the more aggressive elements of the offshore industry may regret ‘winning’…      

Sin Tax Error: resisting reasonable gambling taxes risks a much worse outcome

By Paul Leyland - Principal Consultant, Regulus Partners

“Friends and neighbours complain taxes are indeed very heavy and if those laid on by government were the only ones we had to pay we might more easily discharge them; but we have many others and much more grievous to some of us: we are taxed twice as much by our idleness, three times as much by our pride, and four times as much by our folly.” Benjamin Franklin

The Gibraltar Betting and Gaming Association, having failed to overturn the UK remote Gambling (Licensing and Advertising) Act, is now attempting a Judicial Review of the forthcoming remote Point of Consumption taxes through the Finance Act.

I think this is a mistake for pretty much the same reasons as those articulated in a previous blog: http://regulusp.blogspot.co.uk/2014/09/point-of-consumption-licensing-beware.html. However, there is a deeper industry issue here which needs to be addressed if it is to be listened to.

The gambling industry at various points supports two conflicting and often almost disingenuous lobbying positions:

·         We pay a lot of tax, therefore we should not be over-regulated

·         We are in a highly competitive sector so we cannot support any/more tax

There is an obvious confusion here to lawmakers and other outsiders, that one part of the industry pushes that paying taxes provides lobbying power, while another part is determined to avoid any material tax footprint. The confusion is added to when both views are expressed by the same company depending upon which division is speaking.

Businesses are not necessarily consistent and they rarely claim to be philosophers. However, in attempting to be pragmatic they open up a very significant practical problem…

In the first instance is it logical that any company has a de minimis tax footprint? Certainly it maximises profit but it is highly unfashionable among government and voters (not to say ethically questionable). If a company busily manufactures widgets, or even financial products, then it might take the view that ‘as a company like any other’; it will take its chances unless or until tax law catches up with it. From a purely corporate governance perspective, this a reasonable risk to run so long as it is disclosed and transparent.

But gambling companies are not like other companies. And not for any moral reason. Or even because they are especially esoteric. But because they are specifically regulated.

The problem for gambling companies is that the same governments that regulate gambling businesses also set the tax for them (increasingly online as well as land-based).

Like it or not, governments can, should, and do regulate gambling.

All gambling companies; black, white or ‘grey’, exist somewhere in a legal, regulatory and fiscal matrix. If they try too hard to avoid tax and regulation they will simply invite governments to ensure that they fail. If the fight becomes public, it is likely to become political. If it becomes political, there will a premium on the politicians becoming vindictive – with the blessing of the voting public.

As Professor Peter Collins put it: "Almost everywhere in the world, where gambling is not primarily an export business, gambling - like alcohol and tobacco - is subject to abnormal rates of taxation, so that government itself has a substantial economic interest in a profitable gambling industry."  

But surely taxes mustn’t be too high?

Undoubtedly, but when making this argument, gambling companies would do well to understand the tax footprint of ordinary companies, rather than assuming that paying a specialist tax gives them a special lobbying position: contrary to some industry assertions, most forms of UK gambling are not materially more heavily taxed than the wider corporate economy, and are much more lightly taxed than most ‘sin’ excises (tobacco, alcohol, fuel).

Moreover, the role of regulated gambling needs to go beyond paying tax to form an effective lobby; Collins again: “Throughout the United States and almost everywhere else in the world, the gambling industry is expected to contribute special economic benefits to the jurisdictions in which it operates. This may consist of promoting earnings from tourism, funding good causes, or paying abnormally high taxes over and above normal corporate, personal, and property taxes.”

More specifically, ‘tax lobbying’ is only logical if at least two of these four statements are true (and probably all four if anyone is to listen in a politicised environment as we currently have in the UK):

1.       Gambling taxes have a higher tax footprint than that of the ordinary consumer pound (including net VAT and factoring in heavily sin-taxed products such as tobacco and alcohol)

2.       There is a material risk that high taxes will create a significant black market which regulation cannot mitigate

3.       Sensible tax rates are driving investment, employment and providing a safe public utility

4.       The taxes generated are more valuable from an economic perspective than the social harm and/or political pressure caused by allowing the activity in the first place

The problem that the UK gambling industry faces (including its offshore remote sector) is that, on the whole, it does not score well on any of the above points, and is (very) poor at communicating when it does get it right.

More profoundly, lobbying should be designed to persuade, not to negotiate: gambling’s negotiating position with government is very weak indeed (small, limited popularity, controversial). More dangerously, overstating its negotiating position can become counterproductive.

The gambling industry needs to show that it is prepared to pull its weight both fiscally and socially if it is to have a voice with its most important stakeholder: the government of its customers. The GBGA might not be overly concerned that there is a contemporaneous review of UK gaming machine regulation in betting shops. It might be equally unmoved by the fact that next May there is a UK General Election, in which two major parties are already setting their stall in a manner not exactly friendly to gambling. But then the GBGA is not directly responsible to the UK government. Many UK-facing operators are (or soon will be), however. Those operators may look at 2014 not as some annus horribilis but as the last of the good old days and a chance to build bridges wasted… If they keep supporting attacks on the hand that feeds them they may very well deserve it. 

Point of Consumption Licensing: beware of what you wish for

By Paul Leyland, Principal Consultant, Regulus Partners

“I fear all we have done is waken a great, sleeping giant and fill him with a terrible resolve” Admiral Isoroku Yamamoto on the Japanese ‘victory’ of Pearl Harbour

The UK Gambling (Licensing and Advertising) Act, 2014 has been postponed for one month to allow Lord Justice Green time to consider the arguments put forward in the Judicial Review. Contrary to some observations, nothing can be read into this delay other than the rather predictable conclusion that the issues are too complex to make a snap judgement.

The case focused principally on legal arguments, as one might expect, which are rather pointless to repeat and in any event are now in the hands of the judge. However, it is important to make two broader points from a policy perspective which could prove far more significant in the long-run than whatever the judgement turns out to be:

1.       Licensing at Point of Consumption (as well as tax) is a growing trend and here to stay

2.       Resistance to sensible regulation from gambling operators, associations and supply-side regulators is counter-productive and substantially increases risks to the sector

First, why is Point of Consumption (PoC) licensing is an irresistible force? Simply because customers are a much more effective source of power, governance and legitimacy than businesses. Ignoring for a moment the natural tendency to want an outcome that best suits immediate economic concerns or fits an existing structure, consider the following:

·         A regulator which gains its authority from a government of consumers is essentially answerable to those consumers: probity is the key reason for existence

·         A regulator which gains its authority from an offshore jurisdiction is principally concerned about jobs and economic impact: business is the key reason for existence

·         A regulator in a supply-side jurisdiction is in a competitive landscape; it must make its regulations attractive, light and fit for multiple markets to attract and keep business

·         A regulator in a demand-side jurisdiction is tasked solely with getting regulation right for its particular market-place; it has a clear mandate to adequately resource and intervene

·         A supply-side regulator is unlikely to respond to the domestic political, integrity or social responsibility concerns of a given country (will, resources, mandate, self-interest); a demand-side regulator is essentially tasked with managing these

You will notice that tax isn’t mentioned there once: PoC stacks up without it.

If you are an operator you probably like the sound of a business-friendly, competitive and light touch regulator. It probably has the added benefit of coming with a very low ‘business-friendly’ tax regime, since the (small) jurisdiction in question gains more from lots of supply-side jobs than it ever could from taxing its (small) population on their remote gambling spend. You’d probably want to defend that status quo. The jurisdiction probably would too – and not unreasonably - in its own economic interests.

However, if you are a politician in a country that has even a middling domestic market, you would be very hard pressed to see anything good about supply-side regulation, other than that not raising the question keeps gambling off the political agenda. Nevertheless, gambling has a nasty habit of getting itself onto the political agenda, despite the best efforts of more sensible operators (or even because of the reckless mischief of others).

Politicians make laws; not businesses, and not even regulators. Politicians, when faced with having to make a choice between PoC or PoS, will overwhelmingly choose PoC, for fairly obvious reasons when comparing the points above (the neo-liberal Gambling Act 2005 being something of an anomaly, which the UK government is now trying to correct). Further, there is nothing in the EU treaties to prevent this choice, only to control the manner and nature of its operation. PoC is therefore here to stay and likely to grow its reach significantly over time.

Significantly, and especially in light of Bet365’s news that they are relocating to Gibraltar, PoC licensing does not necessarily reduce the attractiveness of PoS jurisdictions. From a UK perspective, Gibraltar (and other locations) offers a concentrated pool of industry veterans, attractive personal tax rates, a solution to the VAT problem (gambling companies in the EU have to pay VAT on services but cannot recover it since they do not charge it), low corporation tax, and comparatively limited additional licensing requirements. There is, on the whole, very little to fight about. 

Given all of this, why is an act of folly for offshore operators and other stakeholders to resist PoC licensing? Again, the answer is really very simple and here the UK provides the best example. Since 2007, the Gambling Commission has regulated with a measured, consultative and evidence-based approach. Political pressure has meant that this has been partially derailed in the context of gaming machines, which I shall come back to. However, for the remote sector, the new licensing regime is not insisting on a wholesale transfer of equipment or personnel, it is not enforcing any material product restrictions, its advertising requirements are relatively benign and no ‘special treatment’ is being given to domestic incumbents. Separately (and it is separately, in law and in intent), there is also a tax rate being introduced which is among the lowest and most consistently applied of any PoC regimes (GBD vs. RGD treatment of bonuses probably being the only big issue). The industry, in theory at least, should have much to welcome in what is one of the most liberal and sensible PoC regimes (not) yet promulgated.

The regime and the regulator have been eminently sensible because there has been no political will to be tougher, eg, through: higher taxes, product restrictions, tighter advertising, more interventionist social responsibility measures (eg, pre-commitments). A regulator which is broadly supportive of the industry has largely been allowed to get on with it. Further, the idea that EU law is somehow pro remote gambling (rather than just anti blatant protectionism or trickily Byzantine) is a myth being pedalled long after the facts speak for themselves (eg, variously tough and restrictive PoC regimes in France, Italy, Spain, Belgium). The irony here is that a tougher approach to licensing requirements would actually make the passage of an Act easier from a European perspective since it would be going far further in terms of protections than anything seen in supply-led regulatory jurisdictions – an irony that may yet bite.

There is a General Election coming up. Two out of three (or four) major political parties are already on the record to be tougher on gambling (or at least some of its forms). There has also been the recent politicisation of gaming machines in betting shops, which still has some way to run (taxes are going up, tougher regulations have yet to be introduced, research is pending). The public, on the whole, are at best dispassionate about most forms of gambling (unless bad practice or ‘tax dodging’ is the issue), but a small constituency are mildly suspicious or worse; the press is probably less keen than the public. There are therefore no votes in being nice to gambling operators (not unless they do the kind of bridge-building work the bingo sector has done, little of which is in evidence elsewhere). On the flip side, there are some points to be scored by being tough: vide B2s (the contentious gaming machines in betting shops). At least in the case of the LBO sector, the operators’ principal crime was probably arrogance and/or complacency, rather than outright belligerence. The Gibraltar (GBGA) challenge, with some (sometimes too-late muted) cheerleading from operators, looks a lot more like an outright attack.

Perhaps if Gibraltar ‘wins’ its JR we will see what a properly annoyed and politically-mandated government is capable of, especially (but not only) if the principal party in Government is Labour rather Conservative: the offshore sector’s sense of victory may not last long…