Markets were expecting a UK tax rate hike on certain gambling revenues on the order of 25% to 30%, reported Jefferies Equity Research analyst James Wheatcroft. Instead, the Labour government’s budget delivered a 35% increase in the levy.
This would, Wheatcroft argued, spark a negative reaction in the markets. His views were conveyed in a 26 November investor note.
Wheatcroft predicted that the steepness of the impost would drive customers to offshore gambling providers. It also would create uncertainty around future revenues, he said, as it has in the Netherlands.
“A differential rate between sports and igaming may not drive the desired outcomes around ongoing sports support given the higher rate of tax for igaming,” Wheatcroft continued, “with bookmakers likely seeking to offset the igaming tax by reducing support.”
Igaming will be taxed at 40%, starting in April. The rate on online sports betting jumps for 15% to 25%, except for horse racing, which remains at the lower impost. Also unchanged is the tax rate on brick-and-mortar sportsbooks (15%), while casinos will continue to see a 20% levy. Bingo taxes would be abolished.
Operators are expected to offset the higher taxes with cutbacks in service. Affected areas, Wheatcroft opined, would be marketing, promotions and sponsorships. Odds would also be shifted in a direction less favorable to players.
“Raising taxes too high is likely to lead to an increase in black market activity and a loss of tax revenues,” Wheatcroft warned. He pointed to the Netherlands, where betting moved overseas once taxes hit 30%, compared to the UK’s 35% blended rate.
Even so, Wheatcroft kept “Buy” ratings on Entain and Flutter Entertainment, anticipating a downturn in their prices.
In a Deutsche Bank investor note published the same day, analyst Richard Stuber further quantified the effect. He predicted a 90% pass-through of the higher taxes in the form of less favorable odds and higher betting prices. He also forecast one-third less profitability for operators. The government’s revenue goal was pitched at £1.1 billion by the end of the decade.
Stuber further noted that the tax proposal coincided with the publication of gambling-revenue data through March of this year. Gross gaming revenue was up 9%, reaching £12.6 billion.
Within digital revenues, igaming grew 15%, one third being represented by online slots, which the Starmer government has targeted for higher taxation. Stuber called online slots “arguably the most politically controversial product … It is perhaps no surprise that this product therefore attracted the largest tax rise.”
The Rank Organization was deemed the winner” by Stuber, in that its expected cash-flow hit went from 35% to 25% once the government’s regimen was announced. The outlook for Entain was deemed “slightly better” than anticipated.
Stuber put “Buy” ratings on Flutter and Entain. “In summary, we see the budget as a clearing event which improves the near term outlook of the UK gambling sector,” he concluded.
