(Except clauses 1, 5 to 7, 11, 72 to 74 and 112, schedule 1, and certain new clauses and new schedules) - Clause 118 - General betting duty

Finance Bill – in a Public Bill Committee at 2:00 pm on 12 June 2014.

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Question proposed, That the clause stand part of the Bill.

Photo of Martin Caton Martin Caton Labour, Gower

With this it will be convenient to discuss the following:

Clauses 119 to 165 stand part.

Government amendments 28 and 29.

Clause 166 stand part.

Government amendments 30 and 31.

Clauses 167 to 170 stand part.

That schedule 23 be the Twenty-third schedule to the Bill.

Clauses 171 to 189 stand part.

That schedule 24 be the Twenty-fourth schedule to the Bill.

Clause 190 stand part.

That schedule 25 be the Twenty-fifth schedule to the Bill.

Clause 191 stand part.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

Part 3 of the Bill addresses the Government’s reforms to taxation on remote gambling. In summary, the changes create a regime in which operators will be liable for tax at the point of consumption, as opposed to the point of supply. Operators will pay tax on gross gambling profits generated from customers in the UK, no matter where in the world the operator is located. The reform to the taxation regime will apply to three gambling duties: general betting duty, pool betting duty and remote gaming duty. As with machine games duty, which we discussed at length in our consideration of the previous clause, the duties are levied on gross gaming yields from such activities, so the tax is chargeable on gross profits, which is stakes less winnings.

The changes include a number of administrative changes to the taxation regime for operators liable for gambling duties. Those changes include a new online accounting system as well as new compliance and penalty regimes in order to enforce the point of consumption regime. The changes, which were originally announced at Budget 2012, follow the Gambling (Licensing and Advertising) Act 2014 and mean that all remote gambling operators, regardless of their location, will be required to obtain a  licence from the Gambling Commission to be able to transact with British customers and advertise in Britain. In other words, in the same way that the tax regime will operate, the licensing regime for gambling—embodied in the Gambling Commission—will also apply at the point of consumption. The changes were originally announced at Budget 2012, yet they will not come into effect until December 2014. Will the Minister indicate the amount of revenue that the Treasury will have forgone during the intervening period as a result of remote gambling operators profiting from UK customers yet still being based offshore?

I have a number of queries on the tax regime reforms. Although long overdue, the changes are very welcome and will ensure that the tax regime for the betting industry, like the regulatory and licensing regime in the form of the Gambling Commission, recognises and creates a level playing field between remote gambling operators, both onshore and offshore alike, and our high street betting shops.

Following the Government’s consultation on the implementation of these measures, the Government’s approach has been outlined in three information notes that Her Majesty’s Revenue and Customs has published to give the affected operators early and provisional guidance so that they may begin preparations for the changes. Will the Minister set out what changes have been made to these clauses and schedules? There have been numerous adjustments following the consultation relating to the responses received. A number of changes were also made following the feedback on the draft versions: first in the Government’s consultation responses, and secondly in the draft Finance Bill last December. Have the Government made significant changes to the actual legislation as a result of the feedback on those two separate drafts? It would be helpful if the Minister could confirm that to the Committee.

In addition to those changes, HMRC has developed and is introducing a new online system, named the gambling tax online system, for liable businesses to register, file returns and make payments in respect of the three gambling duties. HMRC’s online guidance suggests that if an operator is required to hold a remote operating licence from the Gambling Commission, such businesses must use the online system. The tax information and impact note states that the new online system will cost approximately £5 million to develop, so I should be grateful if the Minister could briefly touch upon the development of that system and give an update on its progress to date. Is HMRC on track to implement the system and therefore ensure that the new regime is enforced as of 1 December this year?

I have some queries about the technical aspects of the reform, but I first want to mention the horse race betting levy. As the Committee will no doubt be aware, the horse race betting levy is a statutory levy collected and distributed by the Horserace Betting Levy Board and provides racing a return from betting activity on its sport to support the horse racing industry. At this stage I should declare that Newcastle race course is in my constituency. The levy funds, for example, prize money, regulatory and integrity services and veterinary research and education. The betting industry gives a proportion of its profits to the levy, which is agreed annually, and the levy does not therefore contribute to the public finances. Currently, offshore remote gambling operators  are not liable to pay the levy, which has been a source of serious concern for the industry. I am aware of general concerns and specifically those of Newcastle race course, which makes a vital contribution to our local economy, particularly in the Gosforth area. It has been of considerable concern, particularly given the fact that revenue from the levy has fallen in recent years from £110 million in 2007-08, which was the average for that time, to £67 million in 2012-13. It is something that the British Horse Race Authority attributes predominantly to the number of betting operators moving offshore.

The issue was raised during the recent passage of the Gambling (Licensing and Advertising) Act 2014, legislation which recognised and established point of consumption licensing for gambling, yet did not extend it to the horse racing levy. My hon. Friend the Member for Eltham (Clive Efford), the shadow Minister for sport, tabled Opposition amendments, both in Committee and on Report, calling on the Government to make those changes and take the opportunity to reform the levy properly for the future, yet Ministers did not acknowledge or accept the need for the provisions—that is, they did not do so until the Government performed a welcome U-turn in the Lords earlier this year and committed both to extend the levy to offshore operators and to consult on wider reform of the levy to ensure that it is fit for purpose. That was confirmed in the Budget in March.

As my hon. Friend the Member for Eltham has already made clear, this is a welcome U-turn from the Government and a move which the Opposition wholeheartedly support. However, considering we first raised this issue with the Government last November we, and more importantly the horse racing industry, have already lost a considerable amount of time in which the Government could have made changes to ensure a level playing field between onshore and offshore contributors to the levy. Instead, we now face a potentially lengthy consultation period, followed by a Government response, before the industry will see any changes.

The Under-Secretary of State for Culture, Media and Sport, the hon. Member for Maidstone and The Weald (Mrs Grant), previously set out time scales for the reforms. I should be grateful if the Minister could restate and clarify those in his response and answer the following queries. When can the horse racing industry expect to see the levy extended to offshore operators? When will the Government publish their consultation on wider reform of the levy, and will he provide any firmer dates than simply saying, “This summer”? What options will the Government consider or consult on with regard to levy reform? When can we expect to see the consultation completed and the Government’s response published? Finally, will he indicate when the Government, following their response, expect to implement the wider reforms? I hope he will give greater detail and assurances about the time scales. We want to avoid any additional delay in implementing the levy on online gambling, because in the meantime an important industry is missing out on vital income that could be put to good use.

I wish to raise two issues on the remote gambling taxation reforms that were highlighted in the Government’s consultation response, which are the biggest concerns for industry and about which there remain outstanding queries. HMRC’s first information note, published in December, set out the Government’s definition of UK customers for the purpose of taxation, and it was  revised in subsequent versions, most notably the addendum to the first information note, following discussions with key stakeholders and officials of the gambling tax reforms implementation working group. The minutes of the working group’s meeting in March suggest that members were happy to sign off on the Government’s revised guidance for defining and determining a UK customer, the final version of which is outlined in the addendum to the guidance note. It states:

“This guidance centres around two steps that operators are expected to reasonably take to determine whether a customer is in the UK or not. The first step is a simple declaration from the customer themselves, disclosing the address at which they ‘usually’ live. The second step requires operators to ascertain with proof, with reasonable certainty, as to whether the customer is indeed usually resident in the UK or not.”

However, HMRC’s addendum states:

“HMRC are not prescriptive about what this information should be, or how many information items should be collected”,

although it expects operators to have a “robust system” for verification purposes.

That differs from the previously published guidance, which was more prescriptive about the information that should be collected and specified the indicators to be verified. Presumably, the change is the result of stakeholders’ feedback and discussions in the working group. Is the Minister confident that the system is significantly robust and not overly burdensome to operators, to ensure their compliance with the reformed regime and ensure the relevant duty is paid when a UK customer gambles with an operator based offshore?

HMRC prescribes a two-UK-indicators rule in cases in which an operator’s verification system returns conflicting results—for example, if some information indicates UK residence, but other information indicates the contrary. The addendum note states that such a text may also be used when it audits the robustness of operators’ verification systems. If the two-UK-indicators rule test is used to audit operators’ systems, can it not be argued that the test should be applied across the aboard, as part of HMRC’s wider statutory guidance? I would be interested to understand from the Minister why that is not the case.

Finally, will the Minister clarify when the Government will publish statutory guidance, as we are only a matter of months away from the reformed regime coming into effect, assuming the Bill receives Royal Assent? It is therefore increasingly important that affected operators and businesses have sufficient guidance as soon as possible.

The second issue is in relation to the Government’s approach to enforcing the new tax regime and the penalties for non-compliance. The Government’s response to the consultation noted the industry’s concerns. It states:

“since many liable operators may be based abroad and have no assets, staff or presence in the UK at present, there was a fear that some operators would seek to continue to trade with UK customers without paying tax. If this happened, this could disadvantage those operators who correctly accounted for and paid tax which was due.”

Following the consultation, the Government chose to employ a number of tools, termed “UK substance requirements”, to ensure compliance, including requiring offshore operators to appoint a fiscal representative—or, as HMRC term it, a “fiscal rep”—in the UK who will be liable for any tax due, and requiring operators to  provide securities of roughly six months’ worth of estimated duty liability that HMRC can draw upon in the event of tax or penalty payment defaults.

HMRC’s third information note also sets out the range of enforcement measures that will underpin the new compliance regime. In the first instance, they include several penalties, rising to imprisonment for up to seven years for more severe offences. In line with the new rules and regulations on the licensing of offshore gambling operators, HMRC will have the power to direct the Gambling Commission to follow a process that may result in the revocation of the remote operator’s licence, meaning that it will no longer be able to transact with UK customers until any issues have been rectified.

I mentioned the requirements to be placed on operators to confirm UK customers, but the Government do not appear, from the guidance published to date, to have set out what penalties and enforcement measures will come into play if an operator’s verification systems were found not to be adequate or effective, or indeed if no systems were in place at all. Will the Minister clarify what enforcement measures and penalties are to be enacted for cases in which an operator’s records are made available to HMRC officers and then deemed by them to be insufficient and inadequate? Have the Government provided for similar penalties and a system for implementing penalties—perhaps revocation of licences—in the event that the verification process to determine whether customers are UK-based is similarly defaulted on?

According to the tax information impact note, no additional funding will be committed to fund the resourcing of the new enforcement measures. It states:

“Excluding this cost, HMRC will manage the costs associated with this reform within existing resources.”

Will the Minister elaborate on the resourcing arrangements for enforcing the regime? What estimates have been made about the cost of enforcing the new measures? How many full-time staff equivalents are likely to be committed to enforcing the new gambling tax regime? Given that it is estimated that HMRC will have lost a total of 18,700 full-time staff equivalents, or 26% of its work force, by 31 March 2016—as well as achieving significant targets and simultaneously recouping increasing amounts of lost tax, both of which are obviously welcome—what additional burden is the new tax regime, termed “strong and robust” by the Government, likely to place on HMRC and its resources? It is imperative for us to ensure that the regime is robust—that it shows minimal avoidance or evasion of the reformed gambling duties—and underpins the level gambling taxation playing field as a result. It is equally important that demands placed on HMRC are not unrealistic and that it is sufficiently resourced to ensure that the level playing field exists in reality, as well as in legislation.

The reforms are welcome, though overdue. I would be grateful if the Minister clarifies the one or two queries I have raised to ensure that the Committee, before we agree to the measures, and obviously interested stakeholders, who I am sure are paying close attention to our deliberations today, have all the facts to hand.

Photo of David Gauke David Gauke The Exchequer Secretary 2:15, 12 June 2014

It is a great pleasure to serve under your chairmanship, Mr Caton.

Clauses 118 to 191 and the accompanying schedules reform the taxation regime for remote gambling to the basis of place of consumption, as we heard from the hon. Lady. Remote gambling operators will therefore pay UK gambling taxes on gross gambling profits generated from UK customers, irrespective of where an operator is located.

The UK’s gambling tax regime has existed for a long time. For example, general betting duty, which applies to bookmakers in the UK, is almost 50 years old. When the duty was introduced, there would have been no distinction between land-based and remote gambling. The duty is based on the place of supply, so it would have captured all betting between bookmakers and their customers. The bookmaker would not have had the ability to go offshore and still reach those customers because bookmakers operated from betting shops. Those shops, and by necessity their customers, had to be within the UK.

The advent and widespread growth of telecommunications, especially the internet, have changed that. In recent years, the online betting and gaming markets have grown substantially, and many of the gambling operators with which UK customers transact are now based offshore. It is unacceptable that operators can easily target the UK market without contributing their fair share to the Exchequer.

The gambling industry has a long history and cultural relevance to the UK. The biggest steeplechase event of the year, the grand national, is a major event throughout the UK on which many British adults will choose to have a flutter. Coral, a major UK bookmaker, said that it expected two thirds of British adults to have money on the 2013 race.

However, these days, many bets are placed remotely with a bookmaker based outside the UK, and are therefore not liable for UK gambling tax. That is not just the case for bookmakers; remote gaming is in the same situation, as it is easy for UK customers to play bingo, roulette or poker remotely over the internet. If such gambles are placed with an operator based offshore, currently no UK gambling duty is due. It is clearly unfair and unacceptable that an operator can avoid UK gambling taxes by being offshore.

The measures ensure that all remote gambling undertaken by UK customers will be liable for UK gambling taxes from 1 December 2014. They bring general betting, pool betting and remote gaming duties up to date by moving their basis to the place of consumption. That will ensure that if a remote operator generates gambling profits from a UK customer, those profits will be liable to UK gambling duties.

Operators will no longer be able to avoid UK gambling duties by moving offshore. Remote gambling operators will pay UK gambling duties on the gross gambling profits generated from their UK customers, no matter where in the world the operator is located. The Government estimate that by 2016-17 the reforms will raise an additional £270 million a year for the Exchequer.

For the reforms to be effective following their implementation, a strong enforcement regime will be required to ensure that operators actually pay the tax  due. The Government will put in place strong enforcement levers that HMRC can use to ensure compliance, including new criminal offences. Failure to comply with the new rules could result in prison sentences of up to seven years, unlimited fines, or the loss of a remote gambling operator’s licence to operate.

The measure will affect all gambling operators that supply remote gambling to UK customers. They are likely to reduce the duty liabilities of remote operators based in the UK, as gambling profits generated from non-UK customers will no longer be liable to UK gambling taxes. The reform will also result in small administrative changes for land-based betting operators, such as a move from monthly to quarterly tax returns, but it will have no effect on the amount of duty due.

In general, however, there will no major changes for land-based gambling operators, which will continue to be taxed by reference to the location of their premises. HMRC is providing detailed guidance and working with the industry to help operators to make the transition to the new regime. Much of the guidance, including how to determine which customers are UK customers for the purposes of the duties, has been discussed with and agreed by the industry in an implementation working group. The Government are mindful of burdens on business and have carefully balanced the increase in the burden placed on operators with the need to put in place a successful enforcement regime.

Amendments 28 to 31 will correct a technical deficiency in the legislation. As a consequence of changes that are being made to statutory penalties by the Ministry of Justice, the penalty provisions in clause 166, as drafted, would be expressed in outdated terms, while the offences described in clause 167 might become liable for an unlimited fine when section 85 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 comes into effect in the autumn. The amendments will ensure that the penalty provisions in clause 166 are expressed in a manner that is consistent with the 2012 Act, and that penalties under clause 167 are limited to an amount equal to the greater of £20,000, or three times the unpaid duty. That does not change the policy intention and prevents the penalty regime from diverging significantly from those for other excise duties.

The changes have not been developed in a vacuum. The Government have carried out significant consultation and engagement with the industry. A consultation on the design of the reform was held between 5 April and 28 June 2012. There were many responses from various interested parties, and the Government took over a year to consider them carefully before publishing their response in August 2013. The consultation directly impacted on many design points of the reform, such as the definition of UK customers being based on whether an individual usually lives in the UK.

Since that consultation, there have been two technical consultations on draft legislation. Comments from the industry arising from those consultations have informed the clauses in the Bill to ensure that the Government’s intention is delivered accurately. Engagement with the industry has not stopped there, however, as HMRC is chairing an implementation working group to ensure that affected operators understand what will be required of them when the reforms are implemented.

The Government have struck a balance between creating strong enforcement levers and causing a burden for compliant operators. We have consulted on further  levers, such as the ability to take action against critical partners, and the ability to block payments and internet access to illegal operators. The Government do not believe that those additional levers are necessary, but will not rule out changes based on experience with the new regime.

The hon. Lady asked what tax has been foregone, given the delay between Budget 2012 and implementation. There was certainly in her remarks an implied, if not explicit, criticism that this is all taking too long. It is worth pointing out that the changes to remote gambling taxation fundamentally change how the online tax regime works. Such reform cannot be implemented instantly, and it takes time to consult the industry and interested parties. I have covered some of the steps that had been taken. The Government have taken time to ensure that the reforms work as intended. I have not estimated or focused on foregone revenues while the design has been finalised, because the point is that we need to get the regime right. In truth, there was not an option of introducing the changes earlier without risking the quality of the new regime.

As I said, the UK tax system for gambling operates on a place-of-supply basis. That means that operators based in the UK for tax purposes pay UK gambling taxes, but those based elsewhere do not. Historically, if operators and customers were typically both in the UK, that system worked well, but for the reasons that I have outlined, the industry has become much more international and internet-focused, so it is right that we act. The reforms will make a significant contribution to the Exchequer.

A concern was raised about whether the change would place an unreasonable burden on business. The Government have had to strike a careful balance between enforcement concerns and not imposing too high a burden on businesses. In light of our engagement with the industry throughout the consultation process, we are confident that we will keep down the burdens on the legitimate remote sector.

I was asked about the changes that were made to the legislation since the consultation. There have been no significant changes; most were made for purposes of clarification.

The hon. Lady asked about HMRC’s IT system. A new online system is being developed that will allow for online filing, with a paper channel option. Operating licence holders will be required to file online. The system is in development, and HMRC expects to register people from September and to issue returns for completion when the first ones become due.

The hon. Lady highlighted an interest in the horse race betting levy, given that she has a major race course in her constituency. The Department for Culture, Media and Sport is responsible for that levy and will bring forward a consultation on extending it offshore, as was announced at the Budget. The measures in the Bill do not affect or cover the levy, but ensure that all operators with UK customers will be liable to UK taxes, which is fair and right.

I was also asked what further guidance HMRC will provide about point of consumption and when it will be published. More guidance will be made available over  the summer and will be informed by ongoing discussion among the implementation working group.

I was asked a couple of questions about the penalty regime for those who fail to keep records. There is no need to introduce specific offences or penalties for failure to keep adequate records because that is already catered for by the general record-keeping requirements under existing legislation, such as the Finance Act 1994. I was also asked whether the regime will put additional stress on HMRC and its resources. I am confident that HMRC has the necessary resources to enforce the rules. It resources to risk, and its funding is agreed annually on the basis of its objectives and responsibility. Hon. Members will be aware that HMRC is succeeding in bringing in record levels of yield, which I am pleased to note.

The Government are reforming the taxation regime for remote gambling by moving it to a place-of-consumption basis. That will level the playing field and provide a fairer basis for competition between remote gambling operators based in the UK and overseas. It will also enhance the competitiveness of the UK’s gambling tax system by excluding profits generated from non-UK customers from the scope of the tax. Most importantly, remote gambling operators will no longer be able to avoid UK gambling taxes by locating offshore. I hope that the Committee will agree to the clauses and schedules, as well as the Government amendments.

Question put and agreed to.

Clause 118accordingly ordered to stand part of the Bill.

Clauses 119 to 165 ordered to stand part of the Bill.