It is also extending the VAT exemption that currently applies to most forms of gambling and betting to gaming machines, meaning that there will no longer be a VAT element in stakes that has to be repaid to HM Revenue & Customs.

The new tax, known as Machine Games Duty (MGD), will be levied at two rates – one applying to Category A, B and C machines, which account for the majority of units, and a lesser rate imposed on the low-stakes, low-payouts Category D devices as well as some products which are not currently classified as gaming machines.

The exact rates have not yet been revealed and may not emerge until draft legislation is published in January for a brief consultation period, but it has been confirmed that they will be calculated as a percentage of gross gaming revenue, in other words stakes minus payouts. Other expenses associated with the operation of machines will not be deductible from the gross revenue.

The new tax will not be implemented for at least a year after the passing of the Finance Bill 2011, and is therefore unlikely to be in force until mid-2012 at the earliest. It is expected that the VAT exemption for gaming machines, however, could come into play more quickly, although not before the passing of the Finance Bill, probable in the middle of next year.

This dramatic change in the tax treatment of gaming comes just weeks after the Department of Culture, Media and Sport pledged to double the maximum stake on Category B3 gaming machines and allow operators to offer more units at each location – and appears to signal that Westminster’s Conservative-Liberal Democrat coalition is a markedly more gaming-friendly government than Gordon Brown’s.

Why they’re doing it

“A gross profits tax will improve the future predictability and sustainability of the tax regime by making it more resilient to technological progress, regulatory changes and inflation,” the government said, adding that “a gross profits tax also supports the government’s objective of a fairer tax system by ensuring the taxation of gaming machines is more closely linked to machine profits.”

The government also “believes that exempting gaming machines from VAT will increase the stability of the tax regime, as gaming machines will then have the same VAT treatment as other gambling activities. Product developments are increasingly blurring the boundary between different forms of gambling. Equal VAT treatment will therefore be a more sustainable approach in the long run.”

The proposed new regime was formulated after a 2009 consultation with gaming companies and industry bodies, in which civil servants strove deliberately to involve smaller operators as well as the bigger groups.

And the opinions of Whitehall’s proposals expressed by the industry in that consultation reveal the likely impact of the changes.

Industry reaction

“Some respondents had no objection in principle to a gross profits tax regime,” according to HM Revenue & Customs, “but expressed concerns over the precise rate of tax that would apply to their businesses. Other respondents were against AMLD reform, and particularly the introduction of a gross profits tax. These respondents highlighted the economic uncertainty within the industry which could be exacerbated by tax reform as well as a general preference for retention of the status quo. Some respondents stated that a GPT regime ‘penalises efficient operators’ and would ‘distort the market’.”

The official report on the consultation continues: “Many respondents noted that a move to a gross profits tax would create ‘winners and losers’. Even if tax reform were on a revenue-neutral basis for the Exchequer, the burden of taxation would change within the industry, with some sectors and businesses paying more tax and some less.”

Indeed, the government acknowledges that “on average, winners will be operators with less profitable machines and low VAT recovery rates”.

Perhaps unsurprisingly, then, it seemed to generally be the larger operators involved in the consultation that were less enchanted with the proposals.

“Many large businesses that operate gaming machines in multiple locations noted that the revenue-neutral rate of tax under a gross profits tax system [that is, the rate which would mean they paid the same as they currently do with AMLD] varies across their businesses, and has varied considerably over time in some cases. Many respondents noted that they feel partially insulated from changes in tax in other gambling sectors under the current AMLD regime due to the different tax rates on machine categories.”

It was also pointed out that “under a single rate of gross profits tax businesses could be at risk of tax increases which were determined by the wider sector rather than the specific sub-sector applicable to that business”.

Handling the change

Besides its impact on the bottom line, there could be practical challenges in moving to a radically different mode of taxation for gaming machines, the consultation revealed: “Among smaller businesses and independent operators, some problems were anticipated, particularly where the gaming machines did not have built in electronic data capture technology.”

Other small businesses “identified problems relating to accounting. They particularly noted the likely difficulty involved in partitioning machine profits across machine categories if more than one rate of gross profits tax were introduced. Some businesses also noted that administrative costs could increase, at least in the short term, as trained staff would be needed to account for payments.”

And some machine suppliers “noted that they rent machines to operators for a fixed fee, and as such do not have knowledge of machine profits. For those businesses, they would be unable to account for gross profits tax without wholesale change of their information-sharing agreements with their commercial partners.”

However, whatever rates are set, and however burdensome in administrative terms the transition is, there’s one other change to the gaming machine taxation regime that will likely please operators of every stripe. While the current AMLD is paid in advance or in instalments, the new MGD will – like VAT – necessarily be paid in arrears, since it’s based on the actual level of gaming activity. In cashflow terms, at least, it looks like everyone will be a winner when we wave goodbye to AMLD.

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