Gambling regulation and tax

I was interested to read Ralph Topping's piece about gambling regulation over the weekend in the Sunday Times.

Ralph has always had a harshly negative opinion of DCMS. But in my view, he only gets to the nub of his piece towards the end, by pointing out, albeit obliquely, that it isn't actually DCMS that has caused the problems he alludes to, at all. It is the Treasury.

I often hear UK regulation being attacked for having failed to achieve what it set out to achieve; most recently, in Phoenix at the end of last week, where I spoke at a legislators' conference. But the truth is that UK regulation didn't fail: the government failure was in chickening out of creating a tax regime that matched it.

Putting in place strict regulation, wherever you are in the world, is no use at all if you don't have anyone sitting under it. And in today's world (that is, in the world of the internet) you won't have anyone (or at least, very many operators) sitting under your regulatory umbrella (in any industry) if you don't tax them at a competitive rate. This is true of onshore industries (which can go offshore). And it is even more true of offshore industries (which have no reason at all to come back onshore). It was always perfectly clear that the gambling industry would not come back from Gibraltar for the privilege of paying more tax, and the moment that the government declined to lower its tax, the attempt to regulate anyone other than people already in the UK was up.

Of course, governments believe that they can impose restrictions on companies which are offshore; that they can use, in other words, a stick rather than a carrot to get them back. This is what the British government has done with its latest announcement - effectively saying that as the rest of Europe is taking this approach, Britain is going to try it too. But it seems to me that their confidence in this is misplaced. As the author R.S. Surtees is quoted as saying in The Week this week, 'more people are flattered into virtue than bullied out of vice'. Why, then, do governments always take the bullying route?

The question the British government has to answer - whatever colour it happens to be by the second half of this year - is 'what do we give the gambling industry in exchange for the tax it pays us'? If the answer to that is 'nothing but grief', then whatever sanctions it wants to impose on those offshore (in terms of limiting advertising in the UK, for example), it won't coax anyone back onshore. (Besides, talk of restricting advertising is all very well until the Premier League starts to complain it has lost half its shirt sponsorships; and racecourses around the country have to find replacement backers for races such as the Victor Chandler Chase.)

On the other hand, the gambling industry is fighting multiple battles in Europe, where successive governments, citing claimed support from the ECJ, believe that Article 49 of the European treaty can be ignored within the field of gambling because 'gambling should be a special case'. (Article 49 allows for the Freedom to Provide Services across border: that is, if what you offer as a service is legal in another Member State and you are licensed to do it in your own Member State, then you don't need a new licence to do it in the second country.) If the British government supported its licencees, by doing nothing more than defending its own regulatory system - if it told other European governments that it has good empirical reason to believe that a system of licensing can protect citizens from the potential harm of gambling just as effectively as having a monopoly - then companies might be more willing to sit under its umbrella.

But if all it can do is tax uncompetitively, impose restrictions, and believe that everyone wants a British kitemark of some sort, then it's going to be left Betfair and Bet365 - the only two purely online operators, to my knowledge, that are licensed in the UK. And whatever sanctions it imposes on anyone else will make no difference at all.