The Effects of Brexit on Online Gambling

After more than three years since the infamous Brexit referendum, we are still no closer to knowing what the implications will be – not only in the UK, but the wider European markets. Whether its free-trade agreements, fishing rights, real estate or the cost of food, the Brexit saga is still yielding more questions than answers. However, one such sector that is often under-discussed is the effects of Brexit on the online gambling industry.

While you might be thinking it will merely be business-as-usual after Brexit, we cannot say with any certainty that this will be the case. As we will discuss in our in-depth opinion piece, this is for a number of potential reasons. For example, a significant number of UK online gambling platforms are headquartered in mainland Europe – notably Malta and Gibraltar. This frictionless access to pan-European settlement could have a direct impact on the tax-efficient savings that UK betting sites have benefited from for a number of years now. 

Another such angle that could see Brexit impact the online gambling industry is domestic taxation. For example, the current serving UK Challencor of the Exchequer – Phillip Hammond, recently announced that he will be targeting UK online casinos that are based offshore. This is in response to the expectation that the UK purse will suffer from a ‘hard’ Brexit. 

Nevertheless, before we delve into the fundamentals, it is highly relevant to take a quick look at the current state of play in the UK online gambling industry. 

Online gambling in the UK: The current state of play

The UK is at the forefront of gambling innovation. What started as a mass market for horse and greyhound betting markets quickly transitioned into an online space that now attracts punters on a global basis. In fact, market share in the UK gambling industry is now shifting well in favor of the online and mobile space, with betting shop revenues suffering immensely. 

This was further amplified in April of last year when the UK government announced it would be reducing maximum FOBT (fixed-odds betting terminals) from £100 per spin, down to just £2. Industry experts expect that this could result in thousands of job losses, and perhaps more importantly, a significant reduction in annual tax receipts for the UK government. In response, the UK recently announced that it would increase the tax rate attributed to online casinos based in the UK from 15% to a whopping 21%. These changes are expected to come into force in October of this year. 

Now, it is no secret that the vast majority of online casinos that offer their services to UK players are actually based abroad. Much of this market is dominated by the likes of Malta and Gibraltar, and in smaller quantities, Jersey and the Isle of Man. Although the major betting firms often deny the fact that this is purely an avenue to reduce taxes on profits, this is exactly what the aforementioned jurisdictions offer. 

However, and as we will discuss in the next section of our article, these highly lucrative tax benefits could potentially be jeopardized by the uncertainties of Brexit.

iGaming Offshore MaltaUK online gambling companies located offshore: Is the party over?

One of the most important concepts of the European Union is the ‘Four Pillars’. This represents the free movement of goods, services, people, and capital. As a result, this makes it seamless for UK online gambling companies to move their headquarters offshore. This not only includes the ability to direct profits to the country in question, but it also allows firms to easily send homegrown employees without so much of a visa-check. 

Now, whether or not UK gambling sites will be able to continue this somewhat cushy access to the tax-efficient savings the Single Market provides, will ultimately depend on the withdrawal agreement. 

The Withdrawal Agreement

At the time of writing, the UK and its European counterparts are still no closer in coming to an agreement regarding the final terms of Brexit. In fact, the two parties are even unable to come to an agreement on the terms of the initial withdrawal, which concerns the period between the UK leaving and the two blocs agreeing a long-term regulatory treaty. We won’t delve into the fundamentals, however, it is important to note that as long as the dead-lock continues, it will be business-as-usual for the UK gambling industry. 

Even if an agreement is made, it is all-but certain that a prolonged transition period will be agreed upon to allow companies to prepare for the exit. This is unlikely to be any time soon, not least because it remains to be seen how any deal on Brexit will get through the House of Commons.

Ultimately, for UK gambling companies to continue enjoying the fruits of offshore residency, it must be on the proviso that the exit agreement makes concessions for the free movement of goods, services, capital and people. But what is the UK implements of a ‘hard’ Brexit?

Hard Brexit

For those unaware, the term ‘hard Brexit refers to the real possibility that the UK will leave the European Union without coming to an agreement. This would cause a severe regulatory conundrum for the UK gambling industry, especially those that are based offshore in places like Malta and Gibraltar. 

The reason for this is that technically, UK companies based on mainland Europe will need to be treated the same as companies from other parts of the world. In layman terms, this means that UK gambling firms will no longer be accustomed to the benefits of frictionless cross-border operations and thus, the tax-efficient benefits that the Single Market offers. On the contrary, the UK as a whole will have no choice but to World Trade Organization (WTO) rules and regulations.

While the full framework of the WTO is beyond the remit of this article, what it means for the gambling industry is that UK companies will no longer be accustomed to the perks of free trade. In other words, European Union state members might be forced to implement taxation tariffs on profits generated by UK online gambling companies, and thus, a long and hard goodbye to favourable tax benefits. 

Brexit UK Gambling TaxWhat will an increase in online gambling taxation mean for players?

Death and taxes – two things that we can all be certain about. Regardless of the specific industry that tax revenues are tied to, an increase in rates is never a good thing for the consumer. The reason for this is that you can be all-but certain the respective company will pass the increase tax obligations on to you. This is no different in the case of Brexit and the online gambling space. If online operators have to pay more to offer their services online, then it is likely that you will impacted directly.

Now, UK players have not paid any tax on their winnings since 2001. Prior to this, the player would be charged duty, which they could either pay no the stake itself before the event, or on the winnings. As such, it is unlikely that you will need to pay any tax when gambling online because of a hard Brexit. However, online casinos will need to recoup these additional costs in one way, shape or form. 

While it remains to be seen how they will do this, one such suggestion is in the form of the house-edge. This relates to the long-term statistical advantages that the casino has over you. Unlike the land-based casino sector, online casinos have the ability to choose what house-edge they would like to install on their software games. The higher the house-edge, the less chance you have of winning, and the more profits the casino yields. 

Therefore, if a hard Brexit is the ultimate outcome of the ongoing saga, then we might see online casinos increasing their house-edge to cover their additional tax obligations.

Less casinos offering their services

Prior to 2014, which saw the UK government enact the Gambling (Licensing and Advertising) Act 2014, online casinos looking to offer their services to UK player did not need to be licensed by the UK Gambling Commision. On the contrary, as long as they held a regulatory license from a recognised jurisdictional body (such as the Malta Gaming Authority), online casinos could target the lucrative UK market. This made it a seamless process, as most of these casinos were already operational, albeit in a different gambling market. 

However, when the aforementioned legislation came into force, it meant that each and every gambling operator that wanted to service UK players must hold a full license issued by the UK Gambling Commission. What this resulted in was a plethora of online casinos exiting the UK market, as obtaining a license from the UK Gambling Commision is no easy feat. In fact, the regulatory body is often seen as the most stringent regulator in the global gambling space.

So why this relate to Brexit?

Well, not all casinos pulled out of the UK market in 2014, as many platforms recognised the size of the British betting arena. Although going through the long-winded approval process of the Gambling Commission is a cumbersome exercise, foreign casinos felt that it was worth the effort.  However, if European based casinos operating in the UK online gambling arena can no longer utilise the benefits of the Single Market, and thus, keep the amount of tax and duty they pay to a minimum, then it is likely that they will simply pull out of the UK market.   

If this is the case, it is likely to have a strong impact on you as the player. Because the online gambling space is now over saturated with thousands of individual operators, this has forced casinos to get more and more competitive. Not only does this transition into the previously discussed house-edge, but it bonuses, too. You see, because so many casinos are now operating in the online sector, they attempt to out-do their rival by offering highly lucrative welcome bonuses. This is a way to entice new players to the platform, which is excellent for the consumer. 

However, if less casinos are active in the UK marketplace, this will lead to less competition and thus, there will no longer be a need to offer lucrative bonuses.

So now that we have considered the impact that Brexit could have on the number of casinos in operation, in the next part of our guide we are going to explore the KYC process.

Brexit UK Casino KYCWill Brexit have an impact on KYC?

For those of you that are old enough to remember the infancy of online gambling, you might recall how easy it was to open an account. In fact, while you still needed to provide basic information related to your name, address and telephone number, there was no technology in place that had the ability to verify the legitimacy of this information. Furthermore, as anti-money laundering (AML) and know-you-customer (KYC) legislation was yet to make the transition over to the online gambling space, players were never asked to upload documents. 

As you now know, the KYC process at an online casino is no longer an option, but a legal requirement. If you were not aware, although each and every member state of the European Union now has legislation that forces online casinos to identify their players, the rules are actually implemented on a European Union-basis. In a nutshell, every few years the European Union will enact its Money Laundering Directive, which sets out a range of rules linked to preventing and detecting the proceeds of crime. As a result of this, all 28 members must install the rules into domestic legislation. In the case of the UK, the rules form part of the Money Laundering Regulations 2017, which reflects the European Union’s 5th Money Laundering Directive.

The reason that this relates to Brexit is because once the UK officially leaves, it will no longer be bound by the constraints of European Union Directives.   

How will the UK treat KYC after Brexit?

So here beggars the question that is on everyone’s mind in the financial crime community. How will the UK view the rules surrounding KYC when it no longer needs to follow the rules set-out in the European Union directive? Ultimately, this could go one of three ways. If the UK decides to keep things the same, it can certainly do so. 

Equally, if the UK feels that KYC in the online gambling space is not stringent enough to prevent the threats of money laundering abuse, then it can choose to step up the regulations. However, some commentators predict that the UK government will actually go the other way post-Brexit, insofar that it could decide to relax regulations. 

The underlying motivation for this is once again linked to taxation. It is widely believed that a hard UK departure from the European Union will initially have a direct impact on the amount of tax revenues the UK purse generates. 

In response, the Treasury will seek to make the UK a more attractive place to do business. While it is unlikely that UK casinos will be able to alleviate KYC processes in their entirety, the UK government might make certain concessions. This could be, for example, the ability to verify a player’s identity by inserting the document number linked to the passport or driving license, rather than needing to go through the cumbersome process of uploading it. 

Once again this is merely speculation. However, as nobody quite knows which direction the Brexit saga will take, this further highlights the potential impact that the UK’s exit could have on its online gambling industry.

Brexit and the online horse racing industry

While this might sound somewhat arbitrary, the point should not be overlooked. While land-based betting shops have taken a significant hit in recent years, the vast majority of this trade has gone to the online sector. Not only is it easier to place a horse racing betting directly from your online or mobile gambling account, but you are usually offered a lot more markets to bet on. 

Now, if you are not from a horse racing background, you should know that the sport is multi-jurisdictional. Not only do jockeys in the British horse racing industry come from a range of different nations, but horses do, too. This is especially true in the case of Irish jockeys and horses that often make the simple trip across to the UK.

However, if the UK departs the European Union on a hard-Brexit basis, this will lead to an end of free movement between member states. As a result, this could have a direct impact on the online horse racing industry, not least because it would be a logistical nightmare for jockeys and horses to move from jurisdiction-to-jurisdiction.

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