Clause 6 - General betting duty
Finance Bill
5:00 pm
Mr Jimmy Hood (Clydesdale, Labour)
With this, with the agreement of the Committee, we will consider schedule 1 and the following amendments: No. 2 in page 84, line 30, leave out `3' and insert `2'.
No. 3 in page 84, line 33, leave out `10' and insert `8'.
No. 4 in page 85, line 23, leave out first `to' and insert `or'.
No. 5 in page 85, line 32, at end insert:
`(1A) For the purposes of a charge under a provision of section 3 in respect of the class of bets to which the provision applies, the amount of a person's net stake receipts for an accounting period is X minus Y, where—
(a) X is the aggregate of amounts which fall due to that person in the accounting period in respect of bets of that class made with him, and
(b) Y is the aggregate of amounts paid by the person in that period by way of winnings to persons who made bets of that class with him (irrespective of when the bets were made or determined) minus any losses incurred in the previous accounting period.'.
Mr Edward Davey (Kingston and Surbiton, Liberal Democrat)
On a point of order, Mr. Hood. How should the rules of the House apply to the Conservative amendments on spread betting since the Conservatives benefited from a £5 million donation from Stuart Wheeler?
Mr Richard Ottaway (Croydon South, Conservative)
I had every intention of addressing the point that the hon. Gentleman just sought to make. I make no declaration of interest, other than to say that I have received advice in preparing my contribution to the debate from the Sports Spread Betting Association, one of whose members is a company that has a shareholder who has made a donation to the Conservative party.
It is clear that there is growing public resistance to paying taxes. We have seen that in the fuel protests, in the reluctance by any political party to commit themselves to raising income tax, and on the levying of general betting duty. It is a phenomenon of the past two or three years that internet and telephone betting from Gibraltar have grown extensively because firms wish to remain competitive against others that offer bookmaking services offshore, because of the growth of the use of the internet. However, the upshot is that bets placed in Gibraltar will not attract the betting duty of 6.75 per cent., nor the horse race levy of 1.25 per cent., nor the administrative costs of implementing those duties, which have resulted in bookmakers levying a tax of 9 per cent. We agree with the Government that reform is needed. The measures have been in place for around 40 years, and as I understand it, internet betting is growing and it is estimated that by 2005 off-course betting will constitute some 9 per cent. of all betting.
The proposal, as I am sure the Minister will explain in some detail, is to switch the tax from a general betting duty to a tax on gross profits, even though it is still called a general betting duty. As far as the bookmakers are concerned, the tax will be on the difference between the sums bet and the winnings. At present, if one puts £1 on at 10 to 1, one either pays £10.90 or, if one sticks at £10, one is deemed to have bet £9.10 and if one wins one gets 10 times the amount staked. What will differ is that the winnings will be subtracted from the sums bet at the bookies and a 15 per cent. tax will be levied per accounting period on the difference between the two amounts.
The tax will not be levied on the punters, but absorbed by the bookies. It will not be passed on, though I understand that the code is voluntary. Will the Minister explain what would happen if a bookmaker broke the voluntary agreement? The purpose is to encourage high-volume betting through the telephone and internet. The new levy applies per accounting period, provisionally on a monthly basis, though the Treasury has the power to vary it.
Fixed odds bookies rarely have losing months. The profit is fairly continuous from one month to the next. The competitive pressures come from rival bookmakers, but that does not apply to spread betting, which is why I tabled the amendments. I hasten to tell the Minister that they are probing amendments, designed to draw out his attitude to spread betting.
Let me explain exactly what a spread bet is. It allows people to bet not on a result, but on the incremental aspects of a result. For example, someone might bet on how many runs England will make in a cricket match.
Mr Richard Ottaway (Croydon South, Conservative)
Yes. I would be interested to hear from the hon. Member for West Ham (Mr. Banks) what spread he would consider in that respect. To return to my cricket example, the spread might be that England will score 300 to 320 runs, and someone might bet a pound that England will score more than 320. If England scored 340 runs, there would be 20 runs at a pound a go and the winnings would be £20. If England scored only 250 runs, the bookies would be owed £70. Someone might bet that England will gain fewer than 300 runs and the same principle applies.
Cricket is only one example: it also happens with football scores, the number of corners in a football match, the distance of a winner in horse racing and even the number of seats by which a political party will win an election. If you would like a tip, Mr. Hood, the IG index for political betting at the moment is that the Conservatives will secure between 208 and 212 seats at the next election. If you would care to stake £10 per seat, when the Conservatives gain 350 seats—[Laughter.] I am sorry, Mr. Hood. Hon. Members may be interested to know that in future political betting will fall under the category of sports betting. Spread bets are sometimes made on the movement of the FTSE or Dow index or of an individual share price. As we shall see, that will be treated differently from sports betting.
Spread betting is different from the bookies. First, it is regulated by the Financial Services Authority, which results in substantially higher levels of compliance costs. Secondly, the key players among the staff are registered and regulated by the FSA. They are highly skilled people who attract disproportionately high salaries. Thirdly, the general betting duty is currently absorbed by spread betters and is not passed on by the bookies. Fourthly, with financial spread betting, hedging is necessary to offset the exposures of rapid financial movements, which also has a cost. At present, only two spread betting companies are profitable. We welcome the Government's recognition that spread betting is different. Fixed odds betting will attract a levy of 15 per cent., sports spread betting one of 10 per cent. and financial spread betting one of 3 per cent., but I put it to the Minister that those figures distort the position.
The industry calculates that the levy of 10 per cent. on sports betting could represent an increase in taxation and revenues paid of 26 per cent. on the calendar year 2000. The 3 per cent. levy on financial spread betting will result in an increase of 180 per cent. compared with the calendar year 2000. If we take one company, Sporting Index, the 10 per cent. for sport represents an increase of 69 per cent., and the 3 per cent. represents an increase on financial spread betting of 170 per cent. Those are quite dramatic increases in revenues to be taken from individual companies. In the previous year, Sporting Index made a fairly modest profit of £2.5 million given its turnover. The extra tax that it will have to pay under the Government's proposals is £740,000. I hope that the Minister realises that it will not be a small incremental increase and that he will say that his object is to be financially neutral.
The situation is exacerbated when we learn that, in respect of fixed odds, it is estimated that the amount of tax paid will be halved. With spread betting, it will in some cases be doubled or nearly trebled. That is unsatisfactory and explains the thinking behind amendments Nos. 2 and 3, which simply ask for a level playing field and fiscal neutrality. After all, we do not want yet another stealth tax on spread betting.
Amendments Nos. 4 and 5 relate to the accounting period. As I said, fixed-odds profits at the bookies are fairly stable. With spread betting, they tend to be rather volatile, and it is not uncommon to have losing months. The legislation proposes that the accounting period is one month and there is no ability to carry forward losses from a previous month. That does not affect fixed-odds betting, but it affects spread betting. Let me illustrate that. If a financial spread betting company loses £2 million in one month but makes £2 million in the next, it is neutral, not up or down. However, it will have had to pay 3 per cent. on the £2 million profit, so it will end up paying a tax of £60,000 when it has made no profit whatever. The situation becomes worse when hedging is also taken into account.
Although the measure is welcome, the amendments must be taken seriously. Spread betting is an infant industry. It is a success story and brings in earnings from overseas. The industry is growing, but the legislation threatens its livelihood to quite a serious extent. I hope, therefore, that the Minister will consider our proposals seriously.
Mr Edward Davey (Kingston and Surbiton, Liberal Democrat)
I have some sympathy with the amendments, despite my attempt at a point of order, which you rightly ruled out of order, Mr. Hood. Although I have concerns that the Conservatives have arguably benefited indirectly from the industry. That should not affect how we discuss tax law. It is irrelevant how individuals or companies decide to organise their financial affairs with respect to politics, and our debate should not be prejudiced thereby. Although I wanted to check that the hon. Member for Croydon, South (Mr. Ottaway) would make such a statement, I welcome it. How we debate the issue should be completely independent of that donation.
On public policy, as the hon. Gentleman said, we have received briefings from the Sports Spread Betting Association, which made it clear that few firms in the industry currently make healthy profits. The Government have recognised in their reform of gaming and betting duty that because of the internet, such companies can easily go offshore. It is indisputable that we must organise the tax system to prevent many jobs and businesses leaving this country as people seek to reduce their tax liability through technological change.
The Government must respond to the probing amendment and prove to the Committee that the rates that they propose are appropriate and will not lead to business leaving the country. If that happens, the net effect for the Exchequer will be negative, and the yield that it hopes to reap from the tax will not be realised. It is our job in the House to ensure that self-defeating tax policies are not implemented. I hope that the Financial Secretary will take seriously the amendment tabled by the hon. Member for Croydon, South explain to the Committee the Treasury's analysis and thinking about the level of the rates, answer the association's points and convince us that the rates should not be lower than the Bill provides.
Mr Michael Jack (Fylde, Conservative)
I first congratulate my hon. Friend the Member for Croydon, South on such a lucid explanation of betting matters. I should not say that he could well find alternative employment, but certainly on the one day a year when most of us visit a betting shop to place a wager on the Grand National, having my hon. Friend to explain the tax position would have been of great assistance—I might even have won, which I did not.
In fairness to the Government, and interestingly, in the Customs and Excise press release announcing what we are debating, there is an acknowledgement that the spread betting industry operates ``in a different way'' and, as my hon. Friend rightly said, it is subject to different regulatory requirements. The Government made their statement about how they thought they ought to equate spread betting with normal betting by revised arrangements of the gross profit tax. However, once the industry saw the proposals, its perception of the impact of the revised arrangements clearly differed from that of the Government.
When the Minister first read the Budget, I am sure that he saw cogent arguments why the numbers in the Bill were right. I should be grateful if he would explain what detailed assessments were made in the real world of the impact of the proposals on spread betting companies. Had the illustrations of my hon. Friend been taken into account, a revised and more generous regime would have been devised, but it was not so. In the interests of understanding our the Government's position, perhaps the Financial Secretary will take us through the calculations or assessment of the spread betting industry that led to his conclusion and tell us whether he feels that maintaining the Bill's status quo may tempt companies to go offshore, with a consequent total loss of tax.
Mr Andrew Tyrie (Chichester, Conservative)
I shall not detain the Committee long because almost all the points that I wanted to make have been made already. I congratulate my hon. Friend the Member for Croydon, South on his excellent exposition of the subject, which shows personal experience on one or other side of the industry. I note that agreement is breaking out on the Opposition benches, even agreement that the point of order made at the beginning was out of order, which is refreshing.
It is clear to anyone who has examined the industry that it is likely to see huge growth. The introduction of new technology will almost certainly ensure that. The industry will also benefit enormously from improved worldwide communication technology and become an increasingly international industry. The UK has a competitive advantage in the industry; we have people who know how it works, are good at it, have thought about it and have been in the game from the start. We have a particular interest in ensuring that we do not kill off the industry or seriously damage it at an early stage. Bearing in mind the industry's unique features, we are probably setting the rates too high, and there must be something in the point made by the industry that taxation on a month-by-month basis, without any provisions for the carrying forward of losses, is unacceptable. I will be grateful if the Minister bears those points in mind; he will probably not want to move too far on them, but if he can at least say that he is considering them, that will be a step forward.
Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
I, too, enjoyed the account given by the hon. Member for Croydon, South, which was a helpful explanation of the issues in the clause. The hon. Member for West Dorset (Mr. Letwin) said this morning that there was nothing exciting in the Bill. Clearly he has not read recent issues of the Racing Post because, if he had, he would have seen that there has been much excitement about what clause 6 will make possible. It will radically reform the way in which betting is taxed and create the right competitive environment for UK-based bookmakers to develop their businesses domestically and internationally. It will give punters a better deal and secure for the Exchequer the revenue stream from betting in the long term.
The largest UK bookmakers have made it clear that, as a result of the reform, they will be able to absorb the tax and end the 9 per cent. deduction that they charge on stakes. That will mean that punters will pay no tax. The clause will also allow UK bookmakers to develop their domestic and international business from an onshore base and therefore compete from a position of strength in a growing global market, in particular for telephone and internet betting. Many UK companies, including all the major ones, have gone offshore in the past year or so in order to offer low tax or tax-free telephone and internet betting.
The hon. Member for Croydon, South asked whether I thought that the bookmakers would deliver the zero deductions. They gave firm assurances before the Budget about removing reductions and have since restated them. Every major bookmaker quoted since the Budget has said that it will end the deductions, and there have been no conditions or caveats to those assurances. Any failure to deliver would be taken into account during future Budget processes, but I expect that competition in the industry will dictate that the reform will deliver deduction-free betting. One player in the industry would not be able to impose deductions if no other company was doing so.
The big UK bookmakers have said that they will relocate their offshore operations to the UK. The extra domestic and international betting turnover that the reform will generate should offer increased employment opportunities in the United Kingdom and benefit the betting and the racing industries. Government revenues will share in the gain from increased turnover in the medium term. I shall read out the reactions to the reform. Ladbroke's said:
``This tax reform will benefit everyone. It is a fantastic example of Government listening to business.''
Coral's described the reform as a
``bold and enlightened decision by the Government which will guarantee the long term prosperity and advancement of the UK betting and racing industry''
There was similar enthusiasm from William Hill, which stated that the reforms were
``Great news for the British punter and great news for UK plc.''
Revenue estimated at £25 million will be lost in the short term as a result of the changes, but in the medium and long term, we expect it to be more than recouped as international and online betting is increasingly captured by UK industry. As the hon. Member for Chichester rightly said, the UK industry is strong and highly respected. If we had not made the change, it is likely that revenue would gently and steadily have declined as online betting grew, almost all of it being hosted offshore.
In the last week we have received receipts for last year's betting duties. After a number of years of buoyant growth, general betting duty receipts fell slightly by about 1 per cent. It is widely accepted that if no change had been made that decline would have continued, perhaps at a faster rate, in the years ahead.
The amendments deal with the new spread betting industry. An objective analysis suggests that it has been more lightly taxed than other sectors of the betting industry, and we have carefully considered the fairest way to deal with it. At one point, the industry favoured leaving the old arrangements in place just for spread betting but that would not have been viable given that it is a minor part of the overall betting industry and that the money involved is a small proportion of the total. Having a separate regime for spread betting would not have made sense and hon. Members did not suggest that. However, Customs analysts considered the data provided by the spread betting firms, which calculated the right rate of tax within the new arrangements. They concluded that the figures quoted by the hon. Gentleman of 3 per cent. for financial spread betting and 10 per cent. for sport spread betting were right. That was fair to the spread betting firms and to other players in betting, as substantial extra costs are incurred by spread betting firms. For example, they pay significantly higher salaries; they face the cost of compliance with financial services regulations and, in the case of financial spread betting, they carry the substantial costs of hedging. That is why the rate that we propose for financial spread betting is so much lower.
Mr Michael Jack (Fylde, Conservative)
I am following the Financial Secretary's analysis closely. He lifted the curtain on the way in which Customs determined whether the tax proposed in the Bill was fair. If the numbers that my hon. Friend proposed had resulted from that calculation, would the hon. Gentleman still have felt that the numbers were fair?
Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
I am not sure that I follow the question. The numbers in the Bill are those that emerge from Customs' analysis as a fair level at which to set the tax. Obviously, if Customs' calculations had resulted in other numbers, they would have been quoted.
Mr Richard Ottaway (Croydon South, Conservative)
I think that my right hon. Friend is saying that I gave him some figures that show that, for example, one company would be hit by £750,000 extra on a £2.5 million profit. If he had known of those figures at the time, would those advising him have thought that that treatment was fair?
Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
Perhaps I should go further because I have a few more points to make.
The companies provided the data on which those calculations were based. There was no shortage of accurate data about spread betting firms when those calculations were made. We depend not only on the analysis of Customs and Excise. As hon. Members may know, we received useful advice in a report—which is in the Library—commissioned by Customs and Excise from Nottingham university business school and Nottingham Trent university. It said on the issue:
``Tax as a proportion of gross profits in sports spread betting has varied from just under 8 per cent. in 1999 to more than 10 per cent. in 1996. So we are sceptical that a gross profit tax of 10 per cent. would seriously threaten the viability of sports spread betting. Indeed, in 1999 William Hill index paid 16.4 per cent. of its turnover in tax''
—so a GPT of 10 per cent. would have significantly reduced the tax burden.
Mr Richard Ottaway (Croydon South, Conservative)
The Minister will be aware that corporation tax comes in on top of the tax that we are discussing.
Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
The Nottingham university analysis takes account of that. Customs and Excise came up with the figures and we have obtained the validation that the figures emerging from that research will not damage the industry, which has added a helpful validation of the analysis of Customs and Excise.
I wish to address the other group of amendments and the question of whether we should allow spread bet bookmakers to carry over losses, given the extra volatility to which members of the Committee have referred.
Mr Michael Jack (Fylde, Conservative)
Would the Financial Secretary consider letting the Nottingham researchers who validated the Treasury position talk to the industry before the Bill concludes its passage to determine whether, in the light of the information that my hon. Friend the Member for Croydon, South has presented and which was calculated by the industry, the researchers are still as confident of the results of their earlier analysis?
Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
I would be surprised if such discussions have not already taken place. I am confident that the Nottingham analysis was based on good information from the industry. Hon. Members are welcome to speak further to the researchers if they wish to do so.
Mr Andrew Tyrie (Chichester, Conservative)
Before the Minister moves to the issue of the rate on carry overs, he say more about what he sees as the Government's objective in setting a rate? Is it to provide a rate that will enable the industry to grow as much as possible to enable revenue to be maximised in the long run? Or is it to secure historic continuity? The Minister referred several times to the rate of tax on the industry in the years prior to the decision taken by Customs and Excise to set the rates. What is his response to the industry's view that the financial spread betting rate of 3 per cent. would represent an increase on the historic rate of about two-thirds on the overall tax on the industry?
Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
I reassure the Committee that the measure is not about short-term revenue maximisation for the Treasury. Our aim was to secure not only an attractive stream of revenue for the Exchequer in the long term but, more importantly, a strong industry. That concern applied to spread betting, which is the smaller part of the industry, and to the wider betting industry as well. I want a successful UK-based spread betting industry that benefits from the new regime, along with the wider betting industry. The objective of the exercise has been to establish a tax arrangement that is fair to all the industry players. It has not been particularly about continuity with the past but establishing a level playing field for the future.
We recognised that spread bet bookmakers face higher operating costs. Analysis of a large sample of bookmakers' returns indicates that there are very few instances in which a fixed odds bookmaker makes a loss in any month—a point made by the hon. Member for Croydon, South—and actually few months in which a sports spread bet bookmaker makes a loss, either. It is true that losses in a given month for financial spread bet bookmakers are more likely, but they are still relatively uncommon. However, some of those who are involved in the industry might not be aware that the law currently allows individual bookmakers or classes of bookmakers to apply to Customs and Excise for longer accounting periods. Customs and Excise will work with the trade to agree the criteria for the use of longer accounting periods to ensure that they are used only where there is a need and not as a means of duty avoidance. That arrangement will meet much, if not all, of the concern behind amendment Nos. 4 and 5. In the past year, one financial spread bet bookmaker made a net loss for three months running but had to pay tax on its turnover. Under the new system, no tax would have been payable in those circumstances, so there is an improvement over the present arrangement.
I have just one minor point in conclusion. There is a technical error in the drafting of the amendment so that it would not actually deliver its intention. However, the substance is clear, and I hope that I have responded to it.
Mr Richard Ottaway (Croydon South, Conservative)
The Financial Secretary will be amused to know that a certain amount of deliberation took place as to whether the wording should be ``minus'' or ``plus''. Our view was that two minuses made a plus. None the less, I think he takes the point.
In dealing with the first group of amendments in respect of the levy of 10 per cent. on sports and 3 per cent. on financials, the Financial Secretary said that his objective is not to maximise Treasury revenues. However, the evidence that I presented indicates that that will be the case. He has been generous with my second group of amendments, but I hope that he will reconsider the first group, if he is not seeking to maximise revenues and if he wants to be fair to all players in the industry. The fixed odds people do not think that they will pay any more in proportion to turnover—we all agree that turnover will increase—and they believe that they will have a level playing field. However, the spread betting people think that they will be paying more and that they will be treated unfairly. The Financial Secretary genuinely believes that that will not happen. None the less, if it does, would he undertake to hear representations from the industry after, say, a year and perhaps give them some comfort, if it turns out that he is wrong and I am right?
As far as the second amendments are concerned, he is being very fair about the accounting periods, and I am sure that the industry will be pleased to hear that Customs and Excise are open to representations. We are content on that point.
Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
Given that we expect a loss of revenue of £45 million more in the first full year of the new arrangements, it should be clear that the exercise is not about increasing income to the Treasury in the short term. Neither do we intend to increase revenue from a particular sector. We have tried to come up with an arrangement that is fair to everyone. That does not mean that we expect that everyone will pay the same in future. It is our view that the duty charged on spread betting has been low compared with what is charged elsewhere. The figures in the Bill, which are endorsed by the Nottingham research, reflect that view. The hon. Gentleman asked me whether after a year I would be prepared to have a look at how things are working out and assess the impact on the industry. I am grateful that he thinks that I will still be in a position to do that then and, yes, I would be glad to so.
Mr Richard Ottaway (Croydon South, Conservative)
I am grateful. If I am sitting in the Financial Secretary's office, I shall do the same. There is a slight innuendo in what the Minister just said. The Treasury's view is that spread betting has been getting off rather lightly and they are trying to bring it up. That is a completely different argument and slightly inconsistent with his level-playing-field point of view. It is the nature of any tax change that there will be winners and losers. We can let it rest that the spread betting people feel that they are marginal losers.
Question put and agreed to.
Clause 6 ordered to stand part of the Bill.
Schedule 1 agreed to.
Clause 7 ordered to stand part of the Bill.