What do the UK Government’s Point of Consumption Tax (POCT) for gambling and the Japanese economy have in common?
By Warwick Bartlett

I cannot think of any logical reason why the UK Treasury would wait until the back end of 2014 to introduce the point of consumption tax (POCT). They have this compelling urge to follow the EU, they need the revenue and bringing it forward will put their antagonists on the back foot.
The question for the betting industry is, when it does finally arrive, what are the business options to cope with such a huge increase in taxes that will drain £300 million from the industry? 

If POCT was already in place and all things stayed the same (they will not) my back of the envelope calculation for Ladbrokes shows that in their half year accounts to June 2013 their digital business would probably have broken even. This assumes that 70% of their online business comes from UK customers.
Using the same rule of thumb on Coral’s 12 week accounts to July 2013 the interactive business would have lost £600,000.
William Hill would have probably paid £42m in POCT on a full year but would still have made £100m profit before corporation tax.
Paddy Power gets 60% of its online business from the UK and is in much the same position as William Hill. They will probably pay about £23m in POCT but will still make a net profit around £50m from Internet activities alone.
Bet365 will be better off than all their competitors. We estimate that 60% of their business comes from overseas with 40% UK where they are already paying 15% GPT on the entire Internet sports book. Under POCT Bet 365 will only be paying gambling tax on the UK business. 

How will POC tax change the business model? 

This is what should happen: The easiest way to address the earnings hit would be to reduce the marketing spend, switch affiliate revenue shares to after-tax gaming revenues and not pre-tax and to reduce general overheads. Although I doubt there is much further to go on the economies already reached. I have completely discounted the idea of building bigger margin into the offer to the customers. The Internet is ultra competitive, it will not happen. Well, not in the interim period anyway. 

This is what will happen: William Hill, Paddy Power and Bet 365 will spend more on marketing not less so as to put their lesser competitors under pressure. The industry will become ripe for consolidation.
In my opinion Ladbrokes and Paddy Power would make an ideal fit for each other. Ladbrokes has the retail distribution and Paddy Power the online expertise. A zero premium share deal makes perfect sense. If you were a shareholder of either would you say yes? I would! In all probability it will not happen and the next best option would be Coral and Paddy Power simply because there are fewer shareholders at Coral to convince and the owners have previously talked about a listing. They want their money back.
When all this has come to pass I would expect some of the POCT to be passed on to the customer.
The closest thing I have seen to the competitive nature of Internet trading in a traditional retail sector is the Jewellery Quarter in Birmingham. Some years back a manufacturer decided to put a shop at the front of his factory. No one thought it could possibly be successful because there was no passing trade. His prices were low so, however, the public were attracted to buying wholesale rather than retail.
Word got around and busieness grew. Before long eight other manufacturers followed and coach trips were organised from all over the country so people could buy jewellery at affordable prices. Today there are 250 retail units fronting factories. Prices are no longer cheap because an excess of competition has caused the model to change from being built on price to choice.
That is where Internet betting is so much better than the betting shop. The offer to the customer is huge and it is worth paying a slight premium to have it. That is what I think will eventually happen with UK Internet gambling. 

UK POC and the Japanese economy 

According to Lex in the Financial Times (14 September 2013), no one likes a tax on consumption except national treasuries. Japan plans to raise its very own consumption tax on purchases from 5% to 8%, quite a leap. With tax revenues at JPY 40 trillion (US$ 0.4 trillion) and expenditure at JPY 90 trillion you can see why there is need for an increase.
Nearly two thirds of sales by Japan’s top 50 companies are generated in the domestic market. Similar to the betting companies in the UK.
Lex goes on to say that ‘
assume every extra yen in tax is a lost sale, then blue chip Japans revenues would have been 2% lower in the last financial year, in hard cash they would have been worse off by JPY 3.7 trillion. Ten times more than what Tokyo intends to spend on Olympic venues’.
So Japan’s consumption tax and the UK’s POC tax have something in common. Both will be unpopular. 60% of business in Japan is domestic as it is with UK gambling companies. The only difference is that in Japan they have no choice. In the UK the imposition of the tax will be counterproductive.
The UK has an unassailable lead globally in Internet gambling. It has spawned numerous businesses that service the industry and this has all come about because of reasonable tax rates offshore so that companies can re-invest in their businesses. That will not be the case in the future. I do hope we have not passed the baton for others to pick up and overtake us.