Clause 7 - General betting duty: betting exchanges

Finance Bill – in a Public Bill Committee at 10:30 am on 15th May 2003.

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Photo of George Howarth George Howarth Labour, Knowsley North and Sefton East 10:30 am, 15th May 2003

I beg to move amendment No. 126, in

clause 7, page 5, line 4, after 'one person' insert '(''the bettor'')'.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

With this it will be convenient to discuss the following:

Amendment No. 127, in

clause 7, page 5, line 4, after 'another person', insert '(''the bet-taker'')'.

Amendment No. 128, in

clause 7, page 5, line 5, after 'third person', insert '(''the operator'')'.

[R] Relevant registered interest declared.

Amendment No. 129, in

clause 7, page 5, line 8, leave out subsections (2) to (4) and insert—

'(2) For the purposes of sections 2 to 5B as modified by subsection (5)—

(a) the bet shall be treated as if it were made by the bettor with the operator and not with the bet-taker, and

(b) the operator shall be treated as a bookmaker in respect of the bet.

(3) But subsection (2) does not apply to a bet if—

(a) the bet-taker holds a bookmaker's permit, and

(b) the bet would not be an on-course bet if the operator were making the bet with the bet-taker as principal.

(4) Section 2 (Bookmakers: general bets) is modified as follows—

(a) in subsection (3) for ''15 per cent of the amount of his net stake receipts for that period.' substitute 'the aggregate for that period of the amounts of duty charged in respect of each individual bet-taker using facilities provided by him.''.

(b) after subsection (3) insert—

(4) For the purposes of subsection (3), the amount of duty in respect of each individual bet-taker in an accounting period shall be 15 per cent of the bet-taker's net stake receipts for that period.

(5) Where there is any doubt as to which of two persons is the bettor and which the bet-taker for the purposes of subsection (1)(a), whichever of the two was the first to use the facilities of the operator to offer the bet shall be treated as the bet-taker.'.

Amendment No. 130, in

clause 7, page 5, leave out line 26.

Photo of George Howarth George Howarth Labour, Knowsley North and Sefton East

Let me take this opportunity to welcome you to the Chair, Sir Nicholas. I know from long experience of dealing with you that you are always fair and, as you rightly point out, firm. I will seek constantly to bring out your fair side rather than the firm.

I begin by drawing the Committee's attention to the fact that I have a relevant registered interest in these matters. I am a remunerated adviser to William Hill and I do not want there to be any doubt about that relationship. I also have considerable constituency interest in that Bet Direct, which is one of the biggest telephone betting services, is based in Kirby in my constituency, and Ladbrokes has a call centre in the Aintree part of my constituency. Both of those concerns are responsible for a number of my constituent's jobs and are a significant part of the local economy. I am also very proud to have Aintree race course in my constituency. Since the arrangements in the clause have an impact on racing, that is important. Finally, I am pleased to draw attention to another interest: I am a part-owner, together with several hon. Friends, of a two-year-old bay filly known as Theatre Bell. I am not sure whether that is an interest, because so far all it has done has cost me money, but we live in hope.

Amendments Nos. 126, 127 and 128 are essentially definitional. They describe the relationship between

the various parts of betting exchanges. The crucial one is amendment No. 129, which proposes an alternative tax regime to that which the Treasury has proposed. I am grateful to my hon. Friend the Economic Secretary; we have discussed the matter previously and he wrote to me earlier this week. He said that he was hoping to create a level playing field through the arrangements, which is a perfectly proper way for the Treasury to proceed. I will comment on whether or not it is a level playing field shortly.

However, I should point out that my hon. Friend the Minister for Sport repeatedly makes the claim, which I think is justified, that we in this country have an industry of which we can be proud. Its integrity is not open to question, which is not true of other betting industries internationally. He has made a convincing case that the betting industry is part of a wider entertainment industry and an important part of the economy. My right hon. Friend the Chancellor recognised that when he introduced gross profits tax, which has been widely welcomed. As my hon. Friend the Economic Secretary pointed out, it has been a huge success in allowing the industry to grow and take its place as a worldwide centre of excellence for those who wish to bet. It has had the effect of bringing some offshore interests back onshore, thereby ensuring that they are properly regulated.

I am grateful and indebted to the Association of British Bookmakers for its assistance in preparing the amendments. I should draw attention to a letter that I have received. It was sent to me only yesterday, and I do not know whether other hon. Members have had copies of it.

Adam Price indicated assent.

Photo of George Howarth George Howarth Labour, Knowsley North and Sefton East

The hon. Member for East Carmarthen and Dinefwr indicates that he has done so. The letter is from the British Horseracing Board and is signed by its secretary-general, Mr. Tristram Ricketts, who is well known to many Committee members. The fourth paragraph of page 1 says:

''While betting exchanges are, in principle, a consumer-friendly addition to the traditional betting scene, it is important that they operate on a level playing field with other betting facilities to minimise the scope for market distortions and maximise the opportunity for fair and open competition. BHB is aware of, and supports, the view of the betting industry generally that such a level playing field is currently compromised by the present taxation arrangements for betting exchanges.''

The penultimate paragraph says:

''BHB shares the disappointment and concern of bookmakers that the Government did not respond positively to these proposals and proposes instead to change the basis of the taxation of betting exchanges in a manner which does not fulfil the key objective of creating a level fiscal playing field. Such a level playing field is a prerequisite of fair competition, the absence of which is proving deeply damaging to the revenues of the Racing Industry, with the implications that may have for employment and investment, as well as to bookmakers. We therefore wish you every success in at least securing a commitment from Government to reconsider the matter as a matter of urgency before further damage is done.''

It might be for the convenience of the Committee if I run through the implications of all that.

I know that betting exchanges are a relatively new concept to some members of the Committee, who perhaps take a less close interest in such matters. They act as intermediaries between the layers of bets and

punters. The majority of their customers do not hold bookmakers' permits, and a significant number are located outside the UK. There is nothing objectionable about betting exchanges, as Tristram Ricketts makes clear. They provide another opportunity for punters to bet in an entirely different way and employ modern technology to facilitate that. However, the problem is that the proposals as set out in the Bill do not, as my hon. Friend the Economic Secretary said in his letter to me, create a level playing field.

The Budget proposals in the Bill require exchanges to pay 15 per cent. gross profits tax only on commission income. That means that those who use the exchanges to lay bets and who do not hold bookmakers' permits will not pay tax, but only a small commission on winnings. Let me illustrate that. A £1,000 losing bet with a bookmaker generates £150 in duty, while the layer on the exchange pays nothing. In terms of any gross win generated by the betting exchanges, the Treasury will be totally dependent on the commission level of the exchange. As a result, the same £1,000 losing bet made through an exchange would generate a maximum of £7.50—or less if the commission rate is less than 5 per cent. In fact, the average commission rate is thought to be about 3 per cent.

That does not represent a level playing field for either the bookmaker or the Treasury. The current proposal, based on betting exchange commission, is flawed, as it gives an unfair advantage to layers on betting exchanges, some of whom may not even reside in this country. It must be appreciated that betting exchanges compete directly with licensed bookmakers. There are not many opportunities to place bets. One can go through a betting exchange or a bookmaker. Some of us might have a friendly wager that has nothing to do with the Chancellor or anybody else, but that is becoming less and less usual.

The betting exchanges regularly advertise in the Racing Post, advising punters to ''join the revolution''. Matching £4 billion worth of bets annually is significant business, and as they claim to have 500,000 matched bets a day, it really is big business. On current proposals, that would produce about £9 million in duty. It is estimated that, if the same volume of business passed through a traditional bookmaker, the duty generated would be about £35 million, so the proposals would involve a significant loss to the Exchequer.

The main marketing approach of betting exchanges is that they offer the punter better value. That is true, but they can do so only because they are not paying their fair share of the costs. The amendment would not penalise betting exchanges, but ensure that the layers operate under the same tax regime as UK bookmakers, with whom betting exchanges clearly compete.

I shall not say a great deal more—

Photo of Michael Jack Michael Jack Conservative, Fylde 10:45 am, 15th May 2003

I have been following the hon. Gentleman's argument closely. I am not an expert in this area, so can he tell me whether, in the traditional sense of placing a bet, one can place bets through the

internet offshore of the United Kingdom, where the tax regime is more beneficial, notwithstanding the change in tax arrangements on betting? That would seemingly put offshore betting on a par with the exchanges that the hon. Gentleman mentions in the amendments.

Photo of George Howarth George Howarth Labour, Knowsley North and Sefton East

That possibility clearly exists, and the right hon. Gentleman is right to point to it. I have no doubt that, if this provision goes unchecked, that will happen. It is not simply a matter of competition. I referred in my opening remarks to the integrity of the industry. The reason why there is so much integrity and trust in the industry is that it is well regulated. If the developments that the right hon. Gentleman describes take place, people will not know how the people they are betting with are operating or what their level of integrity is.

Betting exchanges are not unique to the United Kingdom: because of its nature, the technology becomes worldwide very quickly. We are all aware of that from other contexts. I understand that Australia and Hong Kong are talking about banning betting exchanges altogether, and there have certainly been complaints from the French racing authorities about their activities in France. I am not proposing anything as draconian as banning them because, in the right context, they provide an alternative opportunity for punters and I would not want that to be taken away. The UK betting industry is fully prepared to compete with betting exchanges, provided the competition is fair. My amendments would create a level playing field in contrast with the arrangements in the Bill, which will not.

Photo of Adam Price Adam Price Plaid Cymru, Carmarthen East and Dinefwr

From his expert knowledge and for my understanding, will the hon. Gentleman elaborate briefly on the implications for horse racing in this country of an expansion in betting exchanges' market share vis-à-vis the licensed bookmaking trade?

Photo of George Howarth George Howarth Labour, Knowsley North and Sefton East

At the moment, British horse racing benefits through the levy, all of which is collected from bookmakers. There is a debate about whether that should be a statutory levy and the Government are thinking about replacing the levy with a more commercial arrangement. That may or may not happen. The basic principle is that the British Horseracing Board owns fixture lists, although the Office of Fair Trading is inquiring into the ownership of those lists. At the moment, the British Horseracing Board benefits from being able to sell the fixture lists and the money that they receive from bookmakers through that arrangement helps to support racing in this country. Betting exchanges are not involved in that and because they do not participate in the levy, racing does not benefit from it in any way.

I am conscious that I have spoken at some length and I do not want to test the patience of you, Sir Nicholas, or the Committee any further. I shall listen carefully to the response of my hon. Friend the Economic Secretary because the matter is important for the betting industry and for racing.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

I have read the amendments and received representations from the Association of British Bookmakers Ltd., which the hon. Gentleman so ably explained. I have considered them carefully and one issue that he is relying on is open to question. He will detect from the tone of my comments that we are not minded to support him today. However, he has raised some valid issues, which, in the circumstances of this rapidly changing market, must be addressed. It is simply not good enough to ignore them.

The hon. Gentleman based much of his argument on the issue of a level playing field and I understand where he is coming from and why. In terms of a level playing field, one tends to think of rights and responsibilities but also of unfair competition. It is on that latter limb of the level playing field argument that he must be basing his case.

There is a challenge to that because we are discussing a market of choice for customers and, as with all marketplaces, whether the product is available and affordable. With betting, affordability is an interesting notion for the normal marketplace test, but it is entertainment, so we can put to one side the issue of whether it goes beyond entertainment to compulsion. However, that is not what is behind the hon. Gentleman's amendments and, because it is that type of marketplace, we as a Parliament and a legislature must be very cautious when considering passing laws, as suggested in the amendments, that would defy the way in which the market is moving. However, the hon. Gentleman has raised valid concerns. If he is, through the amendments, providing a serious and well-thought-through marker of what needs to be addressed, that is fair and helpful to the Committee, to the House and to those beyond. I in no way criticise that, but I am not in a position to offer the official Opposition's support for the amendments today.

I take seriously the concerns that the hon. Gentleman raised in regard to the British Horseracing Board. I am a little more familiar with that, although I do not partake in the ownership of a leg or even a forelock. I have had representations on such matters on various occasions, not least because I have a constituent who has been a member of that board and who has ensured that I am aware of its views.

We have to recognise—as did the hon. Gentleman—that betting exchanges are a very successful new phenomenon. Although it is absolutely right for the margin earned by an exchange to be taxable, we have to be extraordinarily careful in addressing the issue of how to make that equivalent to what happens with other forms of betting and gaming under the GPT regime. The real complaint from the Association of British Bookmakers is, as I understand it, that there is a chance that it will be forced to compete against what is in effect an unregulated sector of the market.

There is always a problem with the word ''regulation''. My party and I abhor red tape. We abhor bureaucracy and the overwhelming culture among legislators and the civil service—with the greatest of respect to them—that they all the time

must find something to do, rather than something to undo. We should all always assume that regulation is the worst of all options. However, in this case, I think that it is proper to look at the complex issues that arise, although perhaps not at law. We are dealing with a type of business that is not only cross-border but even ethereal, or ether-driven. That challenges our normal notions of jurisdiction.

I am conscious that one could go down a long cul-de-sac on that point—it would certainly be a cul-de-sac where my personal knowledge of the conflicts of laws and rudimentary legal education are concerned—but there is a major issue here. This is the sort of real-life example that can impact on what are often academic and learned issues, upon which it would be wholly presumptuous of me to give an opinion.

Photo of Adam Price Adam Price Plaid Cymru, Carmarthen East and Dinefwr

I am listening with great interest to the points that the hon. Gentleman is making, although they seem somewhat inconsistent with the arguments on tax neutrality that we will soon be hearing. I hope that his comments have nothing to do with the fact that one of the main owners of a successful betting exchange in the UK is a major funder of the Tory party.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

As I have said, this is not my area of expertise but I am glad to note that we are developing policies in this field—not least on the clause—that are gaining such widespread support that some people feel compelled to ensure that we have the best possible opportunity to prevail at the next general election.

Photo of George Osborne George Osborne Opposition Whip (Commons) 11:00 am, 15th May 2003

I should correct the hon. Member for East Carmarthen and Dinefwr. The declared donor to whom he referred is an owner of a spread betting company. That is different from a betting exchange. The clause refers explicitly to betting exchanges, not to spread betting firms.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

I am very grateful to my hon. Friend and neighbouring Member of Parliament up in Cheshire. I am glad to see that, as always, Cheshire contains a multiplicity of expertise on which I can draw. While recognising that helpful distinction, I accept the serious underlying point made by the hon. Member for East Carmarthen and Dinefwr.

As we examine this difficult area, I want to make sure that the counter-intuitivity of the matter is understood. On tax neutrality and the level playing field, the challenge is to capture betting exchanges, which exist in a different marketplace and have almost ethereal geographic locations. I do not underestimate the challenge to the Treasury in raising revenue. We should not always seek to step in rather than stepping aside to let markets find their own levels. Because I veer more towards the latter approach than the former, as a matter of principle I would prefer to hesitate rather than rush into such a rapidly developing area.

The amendment moved by the hon. Member for Knowsley, North and Sefton, East (Mr. Howarth) is underpinned by an important point. Unlicensed bookmakers should be tackled through regulation to protect the consumer. It is appropriate to examine the

issue if we have consumer protection in mind. It is neither appropriate nor right to tax the exchange as though it generates the income from the bet because all the exchange actually earns is a margin. When people bandy the numbers from exchanges around the City, they are often discussing very small margins because where volume is all, turnover can be wholly disproportionate to the true element of a business. Although those points are arguable; they provide an analysis of what is taking place.

On that basis, we cannot support the amendment. We urge the Minister to examine the question of unlicensed bookmakers and the appropriateness of improved regulation to address some of the points behind the hon. Gentleman's concerns.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

I warmly congratulate the hon. Member for Knowsley, North and Sefton, East on raising the issue. He obviously shares some of my concerns, which I expressed when we debated the previous clause, about neutrality between different forms of betting and gaming duty. At the beginning of his contribution, I thought that I heard him say that he had secured an undertaking from the Economic Secretary that there should be a level playing field.

Photo of George Howarth George Howarth Labour, Knowsley North and Sefton East

My hon. Friend the Economic Secretary is more than able to explain himself. I referred to a recent letter from him in which he used the phrase ''level playing field''.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

I am grateful to the hon. Gentleman for that clarification, which moves us forward. I also congratulate him on making more progress with the Economic Secretary in his letter than I have managed to make in a number of exchanges in Committee. Given that the Economic Secretary has given an undertaking to the hon. Gentleman that he is in favour of a level playing field, perhaps he can explain how it would differ from the concept of tax neutrality, which I was talking about earlier. Is a level playing field the same as tax neutrality? He has said to me on a couple of occasions that he is not in favour of tax neutrality, but he has given an undertaking to the hon. Gentleman that he is in favour of a level playing field. It would be useful to know the difference between the two.

My suspicion, which has only been underpinned and confirmed by the Economic Secretary's reticence in debating the issue, is that although the Government have tried to move policy in the right direction, they will not ensure consistency between the different areas of taxation and that they hope to keep that aspect of policy making in the dark. He smiles, but he has been less than forthcoming in his answers. Indeed, he refused to give way to clarify various points on the last clause. If he is committed to a level playing field, can he tell us what it is, and will he have the courage and the openness to engage in debate and to publish his assessment of tax neutrality or a level playing field in the different areas of betting and gaming? If he has decided that in some areas the level playing field requires the taxation of particular products to be unequal, because he is trying to deal with issues such as offshore gambling and the potential for evasion of tax revenues if they are set at the same level, can he acknowledge that explicitly?

If we do not press the Treasury to be open about the assumptions that it is making and whether there is actually tax neutrality, the danger is that we may end up—as we have done, for example, on alcohol—with taxation that is not consistent or coherent across a range of products. I hope that the Economic Secretary can deal with those concerns when he sums up. If he cannot address the points that I have put to him, I hope that he will be more open and helpful to his hon. Friend.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Clause 7 and amendment No. 129 both appear to me, and I am not well versed in such matters, to deal with the relatively new phenomenon of betting exchanges, and closing tax loopholes—perfectly legitimate loopholes, I hasten to add—in the way betting exchanges operate that give them an undue tax advantage, as my hon. Friend the Member for Knowsley, North and Sefton, East argued. If that is the case, I seek the Economic Secretary's reassurance because Europe's only all-weather floodlit racecourse, Dunstall Park, is in my constituency and on-course betting takes place there. I have a constituency interest in making sure that undue tax advantage is not conferred on betting exchanges.

Photo of George Osborne George Osborne Opposition Whip (Commons)

As this is the first time that I have spoken in the Committee, I begin by paying tribute to you, Sir Nicholas. You are my constituency neighbour—Cheshire is well represented in the Committee—and you have been a good colleague to me and, I venture to say, a friend. Now that I have done my sucking up, I could sit down, having achieved a principal objective.

I intend to speak against the amendment moved by the hon. Member for Knowsley, North and Sefton, East. I have come to regard him as a friend, too, in the two years that I have been here. We served together on the Public Accounts Committee and enjoyed a very good day together at the Grand National in his constituency, so it pains me to speak against him.

I declare an interest of sorts. It is not a pecuniary interest, but members of my extended family—my uncle, for example—run casinos, gaming businesses and so on. Not for the first time, I am going to disappoint my family and speak against what is in their interests, by speaking for the betting exchanges. They are an enormously innovative and positive force in the gaming industry. The hon. Gentleman gave us some idea of the scale of what goes on. Betfair, the largest company, handles about 500,000 bets a day, and processes about £4 billion worth of transactions, but it is not a bookmaker in the traditional sense; it is a market. It links together those who want to place bets and those who want to lay bets. It is different in concept from a traditional bookmaker of the kind that one might find on the rails at Aintree or anywhere else.

The effect of amendment No. 129, which is the meat of the group, would be to create what is known in the business as an aggregated profitable layers tax. That was actively considered by the Treasury and Customs and Excise as part of the consultation.

Photo of George Howarth George Howarth Labour, Knowsley North and Sefton East

I am grateful to the hon. Gentleman for his warm remarks about me. He makes a distinction between betting exchanges linking punter to punter and regular bookmakers. Is he aware that some of the rails bookies are linked by computer to betting exchanges and are using that facility to hedge their bets? It is quite possible that punters, because they do not know with whom they are dealing, are betting with bookmakers who are not regulated for that kind of trade.

Photo of George Osborne George Osborne Opposition Whip (Commons)

The hon. Gentleman makes an important point, which is at the heart of the argument. I will come to that because there are serious problems with the solution that he proposes. As he suggested, his amendment would tax betting exchanges as if every single layer on the exchange was acting as a bookmaker. I have doubts about his amendment.

As the Department for Culture, Media and Sport recognised in its position paper on regulation for betting exchanges, it is not reasonable to treat most betting exchange users any differently from other gamblers. The fact that some gamblers like to bet on an outcome that does not happen, as well as an outcome that does happen, does not make them bookmakers. Indeed, spread betting firms of the kind that we were talking about earlier have offered that for many years. Traditional bookmakers have begun to do it more recently. Betting exchanges and spread betting companies have done an enormous amount to gee up—to use a pun—the traditional bookmaking industry and have been a force for good in the gaming industry in getting people to improve their act.

Photo of George Howarth George Howarth Labour, Knowsley North and Sefton East

Does the hon. Gentleman accept that, although bookmakers are regulated and spread betting organisations are regulated by the stock exchange, betting exchanges are effectively unregulated?

Photo of George Osborne George Osborne Opposition Whip (Commons)

The companies are regulated in the sense that they will be registered for tax and have to deal with the Treasury. It is worth pointing out that the clause will considerably increase the tax that they pay. That is something for which the companies have volunteered, in that they have supported the Government's proposal. Under the current arrangements, they pay about 5 or 6 per cent. of the commissions that they collect in tax. Under the Government's proposal, which has been accepted by the betting exchange industry, the companies will pay 15 per cent. of the commissions that they levy. That is quite a substantial increase.

I have other problems with the amendment. The liability is exorbitant. It is estimated that around 40 per cent. of Betfair's commission revenue would be swallowed up by betting duty. That 40 per cent. compares with 6 per cent. under the current arrangements and 15 per cent. under the arrangements proposed by the Government. Some of Betfair's smaller competitors, which are trying to enter the market, would have up to 80 per cent. of their revenue swallowed up in tax. That would obviously be an extremely exorbitant tax liability.

Another criticism is that things would be horrendously volatile. Liability would swing hugely—far more so even than under the current arrangements. Indeed, one of the central arguments deployed by the Government in introducing the legislation is that the existing arrangements are volatile. The volatility is referred to in the explanatory notes. The hon. Gentleman's measure would make things even more volatile. The measure is anti-competitive because new entrants to the market and those trying to charge lower commission rates would suffer enormously.

The proposal is also open to manipulation. It would be extremely easy for users to manipulate their liabilities up and down. A clever, or professional, layer could quite easily get round the provision by manipulating the way in which they laid their bets.

All those factors would mean that exchanges would have to pass on all or some of the charge to users to remain in business and that would be unfair on punters. It would in fact tax punters for using Betfair. For example, Sir Nicholas, if you were to put a bet on at William Hill that Manchester United might not win the premiership—

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

How about a bet on the Conservative party not winning the next election?

Photo of George Osborne George Osborne Opposition Whip (Commons) 11:15 am, 15th May 2003

So that I am entirely neutral and gather support across the Committee, let us say if you were to put a bet on at William Hill that the Liberal Democrats would not win the next election, Sir Nicholas, you would not pay the same tax as you would if you placed the same bet at Betfair. Under the arrangements proposed by the hon. Member for Knowsley, North and Sefton, East, you would be treated as a bookmaker in laying a negative bet. That would be unfair and would undermine the major attraction of the betting exchanges, which is that one can trade in and out of positions. Both Customs and Excise and the Department for Culture, Media and Sport say that they want to encourage new, innovative and consumer-friendly products: betting exchanges are exactly that. As the hon. Member for Knowsley, North and Sefton, East said, the Bill would drive more rather than fewer punters to offshore alternatives. I mentioned manipulation. It would be easy to manipulate one's liability to zero if one set up two accounts and deliberately lost one's bets in each account.

Betting exchanges are new and innovative. In recent years Governments of both political colours have tried to catch up with changes in the betting industry, a point made persuasively by my hon. Friend the Member for Eddisbury. It would be a mistake to try to tax and regulate that innovation out of the market. As we found with traditional bookmakers, it would simply drive them offshore to places such as Gibraltar. Betting exchanges have been good, but supporting the Government's proposal will considerably increase the tax that they will pay. Exchanges create a true level playing field, where all betting operators are taxed and regulated in the same way as are all punters, wherever they place their bets.

Photo of Michael Jack Michael Jack Conservative, Fylde

When I first looked at this matter, it seemed that one area of betting was getting away with it and another was not. However, on examining the substantive clause to which the amendment refers, I find that that is not the case. A change is proposed to impose higher taxation on the exchanges than at present. I want to follow up, with a question to the Economic Secretary, a point that the hon. Member for Yeovil made about tax equivalence.

The question whether exchanges are being fairly or unfairly treated turns on the nature of what is available to be taxed. With taxation, one must crystallise out a certain amount of money at a certain time and then, if one decides that it is legitimate to tax it, determine the rate of taxation. In the case of the onshore betting arrangements in the United Kingdom, it is determined that the point of taxation is the crystallisation out of the gross profit of the enterprise. In the case of the exchange, what crystallises out is an amount of money known as the commission income. Does the Economic Secretary believe that the commission income is the same as the gross profit, or are they different? He could argue that the gross profit is influenced in the case of onshore betting by the nature of the book that is determined. In other words, one can decide what one's gross profit is by manipulating the odds at which one accepts bets. That determines the amount of money that falls to be taxed.

In the case of the exchange, if I have understood that operation correctly, the commission income comes simply as a result of the amount of business transacted through the exchange. In other words, the way in which it works is hardly influenced by the providers of the exchange.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

My right hon. Friend makes an extremely interesting analysis of the position. It is fair to say that, in relation to the betting exchange, the income is an introductory commission from putting two parties together, but, above all, it is volume driven, whereas the other one naturally has to be price driven, or the book would simply not perform.

Photo of Michael Jack Michael Jack Conservative, Fylde

My hon. Friend crystallises my argument into an elegant sentence. If the descriptions of sums of money to which taxation rates are applied differ, conventional betting may blow the whistle and call foul, but we are not comparing like with like. If the Economic Secretary sustains that argument, high as is my regard for the hon. Member for Knowsley, North and Sefton, East, the Government are right to do what they can to have an equivalence of taxation, but it may be impossible to have exactly the same tax regime, because we are not taxing apples and apples.

Photo of John Healey John Healey The Economic Secretary to the Treasury

I welcome the fact that my hon. Friend the Member for Knowsley, North and Sefton, East tabled the amendments to enable us to have such a well-informed and genuine debate. For the benefit of the Committee, it may help if I explain that betting exchanges facilitate betting between private individuals. Such companies provide a web-based service where two customers can come together and take bets against each other. One set of customers, known as the layers, offers odds; the other set, known as the backers, takes the odds and puts down a stake.

The general practice is for the exchange to make its money by charging commission on the winnings.

At present, as the hon. Member for Tatton said, the exchanges pay duty based on the aggregated gross profits of the layers. The amendments would prevent our achieving the purpose of the clause, which will move betting exchanges on to a level playing field with bookmakers, who are, in my hon. Friend's words, competing directly.

To answer the questions of the hon. Member for Yeovil and the right hon. Member for Fylde, from June, betting exchanges will pay 15 per cent. tax on the total commission that they receive, assuming that the amendments are not agreed to. There will be a fairer and simpler relationship between tax and profit. As the hon. Member for Tatton pointed out, the measure has been welcomed by the betting exchanges.

We considered several options for changing our approach to the taxation of betting exchanges, including basing the assessment on the winnings achieved by one set of the customers—that is, the layers—which is what the amendments of my hon. Friend the Member for Knowsley, North and Sefton, East seek to do. However, we came to the view that such a system would increase rather than decrease the problems highlighted by our review of the reforms that we made earlier. In particular, under the business model that is used by exchange operators, duty liability would be highly volatile and there would be a significant and perhaps increased risk that liability could exceed the revenue generated.

I understand why mainstream bookmakers wanted us to adopt a different approach to taxing exchanges, but we have tried to achieve a fair outcome that levels the playing field for those who are in direct competition. We believe that that is achieved by focusing on the gross profits of betting exchanges—their commission—and the gross profits generated by those using facilities by way of business, which are already catered for under existing provisions.

Therefore, just like bookies, betting exchanges will now pay tax of 15 per cent. on their gross profits.

The amendment would keep exchanges in the current situation, in which their tax liability is determined by the gross profits of those who lay bets. My hon. Friend made a particular point of that, so perhaps I should emphasise that the vast majority of exchange customers are recreational users, according to the industry's data. We do not want to tax those private individuals. Indeed, the betting tax reforms that we have put in place move the duty charge away from customers and on to businesses. If we were to tax all layers, we would have to deal with minute tax returns from thousands of individuals.

I welcomed my hon. Friend's concern about the possibility of a significant loss for the Exchequer. The industry's data suggest that the additional revenue that would be raised would be minimal—some £5 million—even if we were to tax all winning laying customers on betting exchanges.

My hon. Friend and the hon. Member for Eddisbury asked about regulation. Although I am fortunate as Economic Secretary to have the best brief in Government among junior Ministers, my responsibilities do not actually range as far as the social regulation of exchanges. Of course, all UK exchanges hold UK bookmaking permits, and my hon. Friends in the Department for Culture, Media and Sport are well aware of concerns about regulation.

Photo of George Howarth George Howarth Labour, Knowsley North and Sefton East

My hon. Friend the Economic Secretary said a few moments ago that the information that had been made available to him showed that the vast majority of transactions were, in effect, punter to punter. He did not use that phrase, but that was the import of what he said. Would that equally be true of the amount of money involved in each transaction?

It being twenty-five minutes past Eleven o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Two o'clock.