John Penrose Minister for Tourism and Heritage Department for Culture, Media and Sport. London SWl Y SDH. 4'" July 2011.

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1 John Penrose Minister for Tourism and Heritage Department for Culture, Media and Sport 2~4 Cockspur Street London SWl Y SDH 4'" July 2011 Dear John, Thank you for your letter dated 5 th May addressed to the Gala Coral Group. As Chairman (Emeritus) I am responding on behalf of Gala Coral. As a starting point I believe that your letter is a balanced consideration of what is Cl very complex, and long standing, set of issues regarding the relationship between racing and betting. Our response is intended to continue in the same positive vein. After careful consideration of the issues raised in your letter the Gala Coral Group would favour the retention of the Levy in a revised form, which removed the Secretary of State from the determination process and establishes a clear platform for a more constructive dialogue between racing and bookmaking. We would not support some other form of quasai commercial arrangement with a regulated price mechanislll. However before addressing, in detail, the three options outlined in your letter we would like to make a number of general observations:~ L We believe that the focus should be on delivering either a true market mechanism or an amendment to the current statutory Levy, and not other quasai commercial arrangements underpinned by a statutory enforcement mechanism. Such new arrangements would in effect be 'Levy Mark 2' without the current statutory protections provided to those who pay the Levy, namely British bookmakers. 2. The basis for a free market currently exists in terms of' sponsorship, media rights and payments for fixtures. These are of course risks on both sides should 'the market' be left to set the price. We may well end lip with twenty five racecourses not Sixty which will undoubtedly concern 'racing', For bookmakers it will inevitably be the Big 4 who 'pick up the tab' whilst some small bookmakers get a 'free ride' in a true free market. However, the free market has an unerring ability to find a solution and the optimum price. Thus we believe there is a valid case for the government to simply abolish the Levy, with reasonable (say three years) notice, and allow the market to set the price for British horseracing to bookmakers. To us this is far preferable to a 'Levy Mark 2' but is perhaps a step too far at this stage in the evolution of the relationship between bookmaking and racing.

2 3. Should the government decide not to back a free market position we would like to see the retention of the current Levy system, amended as necessary and would not support its replacement by a hybrid market mechanism or a regulated price mechanism which is in effect Levy Mark 2 There are two reasons why we have taken this position:- a) Despite its faults the current Levy system has stood the test of time and provides statutory rights and protections to bookmakers, who at the end of the day are paying over 10% of their gross profits from British horseracing, and therefore deserve and require certain protections under Jaw. b) Statutory payments are exempt from VAT. With HMT continuing to remove gambling products from the VAT regime the imposition of VAT on any regulated, but non statutory, payment would not be recoverable by bookmakers and thus there would be an immediate 20% leakage from the funds transferred from bookmaking to racing. History tells us that the bookmakers will inevitably pick up thattab! 4. Whilst we fully accept the desire of the Secretary of State not to be involved in what he sees as essentially a commercial relationship, it should be remembered that the 1969 Betting Levy Act transferred determination responsibility from the government appointed members (GAM's) of the Levy Board to the then Home Secretary. As I am sure others will do, I would like to remind you of the words of the then Home Office Minister (Elystan Morgan) in 1969:- "It had become clear that the independent members of the Levy Board, who must necessarily be closely associated with claims of expenditure on horseracing, had come to be seen by the bookmakers as insufjicientiy independent to exercise this determination. The same charge cannot be levied against the Secretmy of State who wjij be completely independent in exercising this function. I stress beyond all argument Gild rhetoric that we had all Second Reading and ill Committee it is this trallsfer of responsibility which will provide the bookmakers with their real safeguard, " The same concerns, and the same need for fundcrs (bookmakers) to have safeguards, still exists today, Thus wc would prefer to retain the Secretary of State in any determination process, 5. However, should government policy have already moved irreversibly away from retaining the Secretary of State in the process, vve would like to sec a new body established for the process of determination. We are firmly of the opinion that the Levy Board is not independent and nor are the GAM's. This should not in any way be seen as criticism of the integrity of the GAM's as individuals but rather a realistic view of the whole statutory process. As long as the Levy Board, and the GAM's, are tasked to improve horse breeding, advance veterinary science and the improvement of horseracing, with no remit whatsoever regarding bookmakers, they will and must be 'one eyed' to fulfil their statutory duties, Furthermore we believe that the licensing system and the regulator (The Gambling Commission) has no part in what is a commercial relationship, albeit one drive by statute. 6. Therefore we would recommend the establishment of an independent determining body, if the Secretary of State is to be replaced in the process. This should be akin to the copyright tribunal with a judge in the Chair and two lay members, appointed through an open public appointments process, who have no connection with racing or bookmaking. 7. As an alternative to determination we would recommend that serious consideration be given to establishing a fixed Levy mechanism by statute. If such a Levy were based on British bookmakers profits on British racing and as Cl single flat rate percentage (no threshold etc.) it would automatically flex according to a bookmakers ability to pay and thus should continue until 2

3 something structurally changes within the system (as happened with media rights a few years ago) at which time the statue would need to be amended by parliament. In this mechanism there would be no annual negotiation and no determination - heaven! The rate of Levy would, in effect, only be changed through an amendment to the statute by parliament. 8. We welcome the governments renewed attempts to tackle the issue of 'Levy leakage' through offshore based bookmakers and professional layers on betting exchanges. We feel that over time, and in particular at the determination earlier his year, British retail bookmakers who employ people; pay rent; and pay taxes in the UK, have been continually asked to fund this leakage. British retail bookmakers are no\'v over taxed and over levied and many small businesses are closing as a result. Therefore if the government is able to capture Levy from offshore bookmakers and exchange layers we believe that the gain is not just for racing and should be shared on an equitable basis by racing, and the equally hard pressed British retail bookmakers. 9. However, should the Levy remain as an annually agreed or determined scheme the role and composition of the Levy Board needs to change. It is palpably unfair that those funding the Levy (British bookmakers) have only one seat on the Levy Board whilst those who receive the funds (racing) have three seats. In our opinion the Levy Board should consist of three from racing, three from bookmaking and three GAM's, one of whom should be the Chair. This will give bookmakers much more influence in how their money is spent, with the GAM's still holding the balance of power. The Levy Boards remit also needs to change so that as well as being tasked to distribute funds to "improve horseracing, breeding and veterinary science" they should also take into account the commercial interests of the bookmakers who fund them. 10. Much has been made by racing of the fact that only the bookmakers can make Levy proposals. Gala Coral believes that this is a fundamental protection in the current Act given to those who fund the Levy and we would vigorously defend the retention of this right. Its existence does not stop open debate and negotiation at the Levy Board and there will remain an independent determination process if the bookmakers proposals are not accepted. 11. The attempts, in your letter, to address the issue of media rights is welcome. However, we were disappointed that the current (now well established) costs were not fully factored into the Secretary of States determination of the 50 th Levy scheme. Media rights are very much part of the commercial relationship between betting and racing and its clearly wrong of racing to continually contend that they are separate issues. Racing cannot sell Cl product (media rights) in the free market and then say they need a statutory subsidy 011 top. In any free market alternative to the Levy media rights will find their own level/price but if the statutory Levy continues, media rights must be facto red into any annual negotiation or long term fixed Levy fee. 12. Again much is made by racing of a wish to return to a turnover based payment systern. All evidence points to the fact that Cl turnover based tax or Levy on betting is regressive and will damage the product, reduce turnover and negatively impact the Levy yield. Therefore it is in nobody's interest to return to a turnover based Levy system as was the case pre Furthermore a gross profits based Levy system provides an automatic adjustment mechanism in the face of changes in the competitive environment and is directly linked to the capacity of bookmakers to poly, whereas a turnover tax clearly is not. Furthermore, if we were to revert to a turnover based Levy system we would decouple the interests of bookmaking (who pay the Levy) and racing (who receive it). For example racing could stage a series of very uncompetitive races which boost turnover as customers seek to 'buy easy money' but will be profit negative for

4 bookmakers, Thus racing boost their income and damage bookmakers profitability at the same time, How can this be equitable? Racing and bookmaking are inextricably linked and need to 'share the pain and share the gain', This can only be achieved by retaining a gross profits based system, 13. In your letter you float the concept of, Levy on winnings' be it a customers or a bookmakers. Gala Coral believes that a Levy on winnings has many of the same negative characteristics as a Levy on turnover, It is regressive and thus not in the interest of racing, bookmaking or Treasury, Furthermore it decoupjes the mutuality of interest between bookmaking and racing, which is the fundamental benefit of a gross profits system and one that we believe must be retained. We are also concerned that a Levy on customers winnings could have a negative impact on the popularity of the prociuct, as it would in effect make British horseracing 'more expensive' to customers than other betting products offered by bookmakers, For the above reasons we would not recommend pursuing further the concept of a 'tax on winnings'. We assume that one of the reasons for considering a tax on winnings is to ensure that betting exchange customers pay levy on their winnings. We would support this as a concept which could be applied to betting exchanges only and thus avoid its highly regressive impact on the wider bookmaking driven market. Alternatively the government could explore other ways to ensure that exchange customers pay their 'fair share' when it comes to tax and the Levy. 14. Your Option 3 talks about a 'horserace betting right'. We believe that this whole concept is flawed both legally and commercially, In effect the govel'l1ment would be creating a legalised monopoly with all the attendant issues of anumcompetitive pricing and market abuse, Our view is that no such right currently exists and it will require not only new primary legislation but also European legislation to create it, The European courts have already ruled that racing data rights do not exist and they are currently challenging the domestic sports Levy in France. It is also clear that such a right could not be given (only) to racing and thus it will inevitably apply to all sports. Therefore, if the overall Levy on bookmaking is not to go up, and it should not, it is obvious that the Levy yield to racing should go down with the money distributed to other sports, This then brings into the focus the question of who owns the rights? In racing it is the racecourse holding the race meeting, so does each bookmaker have to negotiate with each racecourse separately? In football will that mean negotiating with over 100 clubs? Also what about foreign based sporting events? So do wc have a central distributioll body - a Sports Levy Board? We then have the issue of who sets the price. As this is a state created one way monopoly the purchaser (bookmakers) must have the protection of a regulated price mechanism set by an independent body. Once you move to this it begs the question of - why bother? Therefore we do not believe that some form of sports betting right will create a truly commercial alternative. If the price is unregulated it will hand racing a state endorsed monopoly and if it is regulated it is a new Levy and open to challenge as state aid, The introduction of any such legislation, to create a sports betting right, would be complex, time consuming and open to challenge. We also believe that its introduction would lead to a proliferation of unlicensed illegal betting activity across the UK and an exodus to unregulated offshore sites. We would also contend that a sports betting right goes far further than the horserace betting Levy, which was set up for a specific purpose, to compensate racecourses for loss of attendance due to the legalisation of off course betting, and thus is not a replacement for the Levy but a whole new piece of legislation. Betting already supports professional sport by feeding in integrity related data, promoting events, sponsorship, paying for TV rights (Sky etc). Also, the National Lottery is the correct funding vehicle for grass roots sport and offers punters both a bet and a benefit to good causes should they wish to choose that product, which incidentally is not available in betting offices, In addition to the domestic

5 difficulties in introducing a right to bet we also believe that it would contravene European free market rules and thus be subject to challenge in the European courts. The European Union is already looking into the issue of sports rights and the funding of grass roots sport. To be effective any sports betting right needs to be Europe wide and that is where the debate and decision should lie, in Europe, and therefore it is not a viable alternative to the Levy, in the short or even medium term. 15. On a final note, and whilst accepting that your letter is a pre consultation straw man, we do feel that the starting point should be a statement of what the government is trying to achieve i.e. the strategic objectives of change. If it is simply to extricate the Secretary of State from the determination process that is one thing, if it is to introduce a free market that is another and a regulated market is yet another. Therefore we feel that the full consultation document must start with a statement of the key strategic objectives inherent in any proposals contained in the consultation documents. Turning now to the three options outline in your letter:- OPTION ONE As stated in (4) above we believe that the Secretary of State was given the power, and the obligation to determine the Levy (from 1969) for very good reasons, which are still valid today. Notably concerns over the true independence of the GAM's given the structure and remit (to benefit racing) of the Levy Board. As British bookmakers are the funders of the Levy it is they who need full and adequate protections in any regulated determination process. In any dispute between bookmaking and racing it is notoriously difficult to get truly independent arbiters and thus we would like to see the Secretary of State retain his / her powers of determination. Should this not be possible we would like to see a new, and truly independent, determination process via a specially established independent tribunal. As an alternative to deterniination we would suggest that the government consider introducing, after independent consideration and determination, Cl flat % rate of GPT Levy which will nex in line with bookmakers profits (up and down renecting the ability to pay) and be set in statute and thus only adjustable through parliamentary action to alllend the relevant statute. A fixed (GPT based) % Levy would also have the advantage of naturally reflecting bookmakers ability to pay and thus would only need adjustment (by p<lrliament) if there were significant structural changes in the market. Such a mechanism would also need to factor in the current, and future, cost of media rights as this is an intrinsic part of the commercial relationship, and transfer of funds, between bookmakers and racing. OPTION TWO Gala Coral would not support Option Two as it is a hybrid arrangement which does not offer the benefits of a free market or the protections (to funders) inherent in a statutory Levy. In addition there would be a 20% (VAT) leakage out of the system. We also feel that the licensing regime is not (legally) capable of being an enforcement mechanism for a commercial arrangement. As stated in Option One above we would support the idea of a fixed Levy % and a mechanism which allows for the on-going cost of media rights to be taken into account when setting the Levy. However we do feel that these objectives can be achieved within a revised statutory Levy, which affords proper protection to the ftlnders (bookmakers) whilst retaining the very valuable VAT exemption.

6 OPTION THREE As stated in (14) above Gala Coral reject the concept ofa 'horserace betting right'. Leaving aside the philosophical and practical issues of introducing what is in effect a new state endorsed monopoly we are firmly of the opinion that such a concept will only work ifit is a European wide (law) 'sports betting right'. Therefore in our opinion it is not a viable short, or even medium, term replacement for the current Levy. Therefore, in summary, the Gala Coral Group believes that Option One is viable although we have concerns as to how the 'funders of the Levy' can be guaranteed true independence in any determination not involving the Secretary of State and how the Levy Board can become a more balanced 'all stakeholder' body, with equal representation for racing and bookmakers. In terms of Option Two, we believe that it is a hybrid, or new statutory Levy, and not a true (free market) commercial arrangement. Therefore we would reject it on the basis that it does not afford the 'f'tlllders of the Levy' sufficient statutory protection and there would also be a 20% leakage of funds available due to the loss of the VAT exemption. Finally Gala Coral would reject, and indeed challenge, Option Three on the basis that no such right (horserace betting) exists and that legislation to create such a right would be fraught with practical difficulties and challengeable unclei' European law. Therefore it is not a viable short or even medium term replacement for the Levy. Furthermore to create a level playing field internationally, we believe any legislation to create a 'sports betting right' mllst be European wide. In conclusion Gala Coral would recommend Option One as the best basis for an improved system. We suggest retaining the current Levy, with all its tax advantages and built in protection for the funders (British bookmakers), whilst removing the need for a bruising determination process by setting a fixed percentage Levy fee on gross profits from British racing in statute, with a flexing mechanism to accollnt for any above inflation hike in media rights/costs, which can only be adjusted by parliament. This will give the certainty and continuity that both businesses (racing and bookmaking) need and will clearly encourage them to develop Cl non adversal'ial relationship base9 upon mutuality of interest. We trust that you will find OUI' observations a helpful addition to what is a complex, and at times acrimonious, relationship between racing and bookmaking. Like you we want to find a positive solution and to move the relationship onto a new (nonhadversarial) plane where racing and bookmaking work together for their common good. We are happy to play a constructive part in any ollhgoing dialogue or consultation and would also ask you to view our submission alongside the submissions of the Association of British Bookmakers, and the Bookmakers Committee of the Levy Board, both of which we fully support. Best personal regards ~ Gala Coral GI'OUp 6