How should gambling machines be taxed?

In this paper, we use the backdrop of the gambling tax debate in the United Kingdom, notably the desire by Government since 2000 to use an evidence-based policy approach, to examine the way in which the taxation of gambling machines has been addressed in recent years, and whether the current system of taxation is optimal. The key change to the taxation of gambling in the UK since the introduction of betting taxation in 1966 was the switch in October 2001 from a system of taxation based on the turnover of betting operators to a system based on their gross profits. A tax on gross profits is a tax on margins and tends to encourage firms to shift from a high-price/low-quantity strategy to a low price/high-quantity strategy. There is a range of published evidence indicating that the expected gains from the introduction of the gross profits tax (GPT) on general betting were indeed realised. While this system of taxation was increasingly applied across a range of gambling sectors, slot machines proved resilient. Until 2013, taxation was primarily by means of a licence fee known as Amusement Machines Licence Duty (AMLD) and levied as a fixed amount paid per machine up front on an annual basis. The size of the AMLD was linked to the type of machine (higher for higher stakes and prize machines). Gambling machines were also subject to the standard UK sales tax known as Value Added Tax (VAT) levied on machine takings (gross profits or “cash-in-box”) but which could be partially offset by recovery of VAT paid on inputs. From February 1, 2013, the system was brought in line with other gambling sectors. AMLD and VAT were replaced by a Machine Games Duty based on a share of gross profits and levied at a higher rate than the VAT. In this paper, we look at the modernisation of gambling taxation generally with particular reference to the taxation of gambling machines.