European Court to Hear GBGA Challenge to United Kingdom Point of Consumption Tax

Whether or not the point-of-consumption tax (POC) enacted by the United Kingdom in 2014 is a barrier to the free trade of services across the European Union is a question that will now head to the Court of Justice of the EU, following a ruling in a UK case yesterday.

Queen’s Court Justice Sir William Charles announced on Tuesday that the matter should at least be heard by the European Court, since whether a European Union trade treaty is being violated is the basis of the complaint, The ongoing ruling is part of the latest in a series of legal challenges to the UK’s POC tax by the Gibraltar Betting and Gaming Association (GBGA), which represents 20 online-gambling companies who want no part of the 15% tax called for on online-gambling transactions involving UK-based bettors

The GBGA complaint’s true merits have yet to be determined, if they exist at all. The first try by the trade group to shoot down the new tax in a UK court failed last year, and this is the second such attempt, using a modified legal argument. The GBGA’s complaint states that the new UK tax violates Article 56 of the Treaty of the Functioning of the European Union (TFEU). That clause forbids establishing tax codes which are protectionist in nature, benefiting domestic operators in preference to others located elsewhere in the EU.

Article 56 prohibits restrictions on the movement of goods and services between EU member states, unless those restrictions are for the protection of the target country’s consumers — in this case, online bettors in the UK. Said GBGA CEO Peter Howitt, “We maintain that the tax regime introduced by Her Majesty’s Government skews the market in favour of domestic providers to the detriment of law abiding operators like our members, in clear breach of European law.”

Viewed with any objectivity, it’s hard to see exactly how Howitt’s claim holds water. The difference the law makes is to charge the same 15% tax on online gambling transactions that is already being charged in the UK’s land-based betting shops. The new POC tax closes a loophole that allowed the now-Gibraltar-based firms to avoid that tax assessment simply by pushing more and more of their business to online sites.

A comment made by the chief of Horse Racing Ireland illustrates this point. Ireland is watching the GBGA-vs.-UK case very closely, as earlier this year it enacted its own new code, based largely on the UK’s model and including a point-of-consumption tax as well.

Said the HRI’s Brian Kavanagh, about the GBGA complaint being referred to the European Court, “It is not an unexpected development. It is one to watch but not one to have concerns about. We will have to wait and see and check out the detail of the case,”

But as Kavanagh noted, in comments to the Irish Times, “The basic position [maintained by the GBGA] is unsustainable whereby you can stand in a betting shop and pay a certain rate of tax on a bet, then stand outside, telephone a bet, and pay a different rate of tax.”

That same argument applies to the UK situation as well. Further, the majority of the GBGA’s members are former UK-based gambling companies which have relocated to Gibraltar over the last decade to take advantage of the tax-haven status offered by the territory to online-gaming operators. Most of the GBGA member companies are still viewed as British firms by the general public, and retain considerable brand awareness and goodwill throughout the UK because it.

Kavanagh also noted that the EU already had a chance to sound off on the POC taxes. Said Kavanagh, “Both pieces of legislation, in both jurisdictions, had to be run by the EU before being introduced so they’ve been through that process.”

The new UK point-of-consumption tax rate is expected to repatriate as much as £300 million annually to the country’s tax coffers that the government believes has gone uncollected through the redirection of betting action to online sites, whether based in Gibraltar or elsewhere. The true effect may be even larger: William Hill, a GBGA member, stated recently that the UK’s POC tax bite represented about £20 million in the first quarter of 2015 alone.

Spread over all of the industry and added up over time, it’s easily a billion-pound tax battle within a couple of years — and that’s why the GBGA members aren’t going to give in without a stiff legal fight. The GBGA complaint also alleges that the new POC tax favors rogue, unlicensed operators by forcing tax-paying companies to offer worse odds, but again, it’s hard to see how that favors domestic operators or violates the cited Article 56, if it’s even true in any significant way.

As of today, the GBGA member firms include 32Red, 888 Holdings, Bet 365, Betfair, Betfred, BetVictor, bwin.party, Digibet, Gala Coral, Gamesys, Gtech, IGT, Ladbrokes, Lottoland, Mansion, Nektan, Ongame, Stan James, Tombola and WilliamHill. As one can see, several of the group’s most prominent firms of former UK gaming giants now incorporated in Gibraltar. Many of these firms remain listed on the London Stock Exchange as well.

No timetable has been set for the matter to be heard before the CJEU, a slowly-moving judicial beast if one has ever existed. Neither the UK nor Ireland has any plans of stopping the collection of the POC tax in the interim, even if it’s true, as several gaming-industry reports have touted, that both countries would be forced to refund the taxes if the GBGA ultimately prevailed in its legal challenge.

Many of the GBGA companies are great betting firms, and the POC tax bite is certainly a hit to their bottom lines. However, a cold dose of reality remains necessary: It’s highly unlikely that the GBGA will prevail in this case, despite the legal effort being put forth. The GBGA’s fight isn’t quite akin to straightening the deck chairs on the Titanic, because it’s not a total disaster, more of a negative market correction. But it may be just as pointless.

Gibraltar’s tiny government has pushed the GBGA’s agenda as well, because they’re even more at risk: By establishing themselves as a tax haven for online gambling and recruiting dozens of European firms, they’ve committed to a path with no long-term security. Roughly a third of Gibraltar’s tiny GDP now comes via the small, mostly-flat-rate fee it charges online-gambling firms for conducting their business from The Rock, and a global wave of countries transitioning to POC tax regimes very much puts Gibraltar’s business model at risk.