Tax

LeoVegas looks for economies of scale to counter UK tax hike

LeoVegas has pointed to the tax rate in Denmark as evidence that a 21 per cent remote gaming duty on games of chance will not impact the sustainable running of its UK business.

This week, Chancellor Philip Hammond confirmed to Parliament that UK Remote Gaming Duty would rise from 15 per cent to 21 per cent, effective from 1 October 2019 – the same time that the long-awaited stake reduction on B2 machines (FOBTs) will come into play.

Details released by the Treasury following Hammond’s announcement have forecast a £1.22 billion increase in income for the government across the first five years.

Irena Busic, Communications Director at LeoVegas, said: “We are active in other regulated markets with a tax rate in that region, for example the 20% tax in Denmark where we are still able to run a sustainable and healthy business.”

The revised RGD rate, brought in to make up for the huge shortfall from cutting FOBT stakes to £2 in the first place, has been criticised because the true fiscal impact of the B2 ban will not have been established by the time of its introduction.

However, the government has at least given gaming operators a 12-month period to find ways to “absorb this increased tax”, while sparing the sports vertical from a similar ruling.

“The decision to increase the tax was no surprise since the discussion has been ongoing for quite some time,” Busic admitted. “It is also a year ahead before the tax is implemented, which is good since the market dynamics have some time to settle – for example the suppliers, affiliates and media partners take their part of the tax – meaning it is not just the operator that take the full effect of the tax.

“Of course, we want to use our size to find economies of scale to absorb this increased tax. For sports, it is the same level of tax as before so that product vertical will not be affected.”

The point here is that while LeoVegas has built a business to offset this tax hike, the UK market will become less attractive to small operators hoping to turn a profit through low-expense differentiation, and in all likelihood increase the pace of consolidation.

It is also possible that this penalty increase could pre-empt a player leakage to the black market if licensed operators are forced to squeeze margins on prices, reassess bonus incentives or pull back on affiliate marketing.

LeoVegas uses the word channelisation to define the proportion of online gambling that occurs within the licensing system. Two years ago, a report commissioned by the Swedish government found that 15-20 per cent was the optimal tax rate for high channeling and favourable tax returns – which perhaps explains its decision to adopt an 18 per cent tax on gross profits within the country’s new regulatory framework from 1 January.

“There is a clear correlation between channelisation and tax rate,” explained Busic. “A high tax rate means a lower level of channelisation. We believe a high channelisation is very important in order to retain an attractive market for professional and sustainable operators, and one in which player protection is high up on their agenda.”