The Bet Collectors

The Economist has an article on Internet Gambling this week. More suited for Scott Ferguson's blog perhaps, but it's worth a read. The bet collectors

GAMBLING, like pornography, is perfectly suited to the internet. Yet while the sex industry has largely evaded regulation, most countries have tried to control online betting to some degree. America in effect banned it, but Britain sought to become a hub for it; a new, liberal licensing regime came into force in 2007. The tactic hasn’t worked. Online betting has proliferated: there are now more than 2,000 sites worldwide. But even among those that target British consumers, most have based themselves abroad. The would-be internet Vegas of Europe is more like an abandoned seaside town.

Now the British gambling industry as a whole is being overhauled. The sale of the Tote, the state-run bookmaker, agreed earlier this month, was one part of that effort. In the next few months the government plans to outline new regulations for online betting, which currently accounts for a fifth of the £11 billion industry, though that share is rising.

The rhetoric that accompanies the announcement will doubtless be about protecting vulnerable citizens and preventing crime. But another big concern is the tax take—or rather the lack of it. The Treasury’s gambling revenues have stagnated since 2007, even as the industry has grown. That isn’t surprising: it is perfectly legal for websites to woo customers in Britain without subjecting themselves to the 15% gaming duty resident companies face (in Gibraltar, one alternative location, the rate is 1%).

The gambling firms’ financial manoeuvres are a problem for some sports, too, particularly horse racing, which since 1961 has benefited from a levy paid by bookmakers to fund events and training. Few fixtures have ever been as popular with punters (or attracted such a fine array of hats) as Royal Ascot, which was held this week; even so, the volume of bets on less glitzy races has declined. The rise of online operators, only a handful of which pay the levy, has compounded racing’s travails.

But how to make online gambling pay? Governments have long staked a special claim to “sin” taxes. That still works for alcohol and cigarettes, but not when the sin is virtual. Gambling levies have in the past been based on the physical premises in which betting takes place: the internet renders that approach unworkable. Some countries, such as Austria and Sweden, have defended their revenues by squeezing out offshore and foreign outfits, but that sort of protectionism is being challenged. For example, in 2010 the European Court of Justice found that the Netherlands had violated free-trade rules by refusing to consider an application for a licence from Betfair, a gaming company based in London. The European Commission is now looking into gambling regulation across the union.

The betting companies naturally argue that the government’s best hope of bringing gambling firms and revenues back to Britain is to slash the gaming duties. The relatively high rates explain why Britain’s two biggest bookmakers, Ladbrokes and William Hill, have moved their online operations overseas. Even the Tote based its online services offshore just before its sale. In the current fiscal climate, however, the chances of such a tax cut seem slim.

It is hard to see how the government can overcome these odds. And with the advent of betting on mobile phones, even more of the market is moving beyond the taxman’s reach. The even bigger worry is that where the sinful have led, others are following: industries such as financial services and retail are going online, and offshore, too.