Bookmakers and casinos have avoided paying around £1bn in UK tax on bets placed by British people by routing them through subsidiaries based in overseas tax havens.
Football, racing and poker betting operators are estimated to be saving around £250m a year by offshoring online gambling – more than the highly publicised recent cases of tax avoidance by Starbucks and Amazon.
Although William Hill and Ladbrokes are UK Plcs with hundreds of high street branches, bets placed on their websites and phone lines are regulated and taxed in the British overseas territory of Gibraltar.
Other big names such as Betfair, PaddyPower and 888 – which heavily market their games in the UK – also avoid paying British tax on "remote" betting and gaming.
The offshoring, which has grown in recent years, allows operators to replace the UK gambling duty of 15 per cent on gross profits with an effective rate of duty of less than one per cent.
All of the top 10 operators in "remote gambling" now headquarter a part or all of their operations in Gibraltar, the Isle of Man or Guernsey – at a cost to the Treasury of £1bn in lost duty since 2009.
The figures dwarf the tens of millions of pounds of tax avoided by Starbucks and Amazon, which have attracted heavy criticism for minimising corporation tax through the use of sweetheart deals in Luxembourg and Switzerland. Yet the Treasury – which is imposing cuts to public services as part of the Government's austerity drive – does not intend to close the betting duty loophole for almost two years.
It is currently consulting on a new gambling duty centred on "point of consumption" – taxing where the bet was placed – rather than where it was taken ("point of supply"), with the intention of introducing the change in December 2014.
The top indigenous British bookmakers say that for years they tried to warn the Government they were being pushed offshore by the UK's "uncompetitive" tax rate in an increasingly global trade.
However, they are also aware that publicity about the amount of money being diverted from the Exchequer by their move to Gibraltar and other places could play badly with the public.
In a statement, William Hill, which saves an estimated £37m annually in betting duty, vigorously denied it was "engaged in any avoidance scheme or artificial tax structure".
Ladbrokes, which saves around £18m annually, said it had only moved offshore reluctantly "to survive and compete".
However, disclosure of the scale of the money lost to the UK Government across the entire industry is likely to provoke anger, at a time of austerity caused by a growing deficit in the public finances. Richard Murphy, director of Tax Research, said: "This indicates, yet again, the toothless approach of the UK's tax authorities to tax avoidance."
Signs that gambling taxation would fail to tackle the rise of the internet first emerged a decade ago. To counter growing foreign competition from gaming sites headquartered in Gibraltar and Malta, in 2001 Gordon Brown replaced betting duty of 6.75 per cent on stake money to a 15 per cent duty on bookmakers' gross profits.
Leading British bookies were widely reported to have entered into a "gentlemen's agreement" with the then Chancellor to move their putative offshore operations back on shore – which they did. But, undercut by rivals based in tax havens, particularly those operating casino sites, in 2009 William Hill, Ladbrokes and SkyBet moved their online and phone business offshore. In 2011, Betfair, the fast-growing betting exchange, joined the exodus by relocating to Gibraltar, telling investors it expected to save £20m in tax annually. Only two major UK gambling companies – Bet365, a family firm based in Stoke-on-Trent, and Sky – pay UK duty on sports betting, although their casino games are located, respectively, in Gibraltar and Alderney.
The Government's current plan is to force companies taking bets from Britons to obtain a licence from the Gambling Commission or risk having their websites and advertising blocked. However the Treasury, which would have to enact the change in a parliamentary Bill, does not expect to introduce the change before December next year and is still considering the results of a consultation which closed last summer.
Several gambling companies are fiercely opposed to the move, arguing that a 15 per cent rate would endanger a British success story.
Other operators back the change in an industry associated with social problems. The Coates family, which owns Bet365, wants the new tax to be introduced as quickly as possible. Ian Burke, chief executive of Blue Square-owner Rank Group, said that the current system of taxation was "indefensible". The Treasury defended its record, saying: "The Government is levelling the playing field on remote gambling taxation. This is a major reform, and the first time a UK Government is taxing remote gambling companies with no base in the UK."
Labour's shadow Treasury spokeswoman, Catherine McKinnell, said: "The offshore gambling industry is making massive profits from tax-paying UK punters and yet hundreds of millions of pounds are potentially being lost to the Exchequer at the same time as ordinary taxpayers are being hit hard by cuts and tax rises.
"It isn't just UK taxpayers who are paying the price – responsible firms who have remained in the UK and employ thousands of people are at an unfair disadvantage. The Government should be straining every sinew to clamp down on aggressive tax avoidance, and loopholes, as quickly as possible."
Mr Murphy added that the Treasury's approach of working in co-operation with business to secure tax agreements was "not working".
"We know it failed in the case of banking where Barclays ignored their deal with HMRC months after they signed it," he said. "Now we can see that the negotiated arrangements with the gambling industry – where they were given all the concessions they demanded – haven't worked."
Addicted Britain: A growing epidemic
Gambling addiction has soared in the UK, fuelled by the rapid growth of online betting.
The number of hardcore addicts has doubled in the past six years to almost 500,000. The number of people in danger of becoming problem gamblers, meanwhile, has reached nearly a million.
One of the areas that has seen the biggest is online gambling.
Around nine million Britons will gamble online this year. The UK online gambling industry is expected to be worth more than £2bn in 2013. The boom was brought about in part by a relaxation of laws regulating the industry under a shake-up by Tony Blair's government in 2005.
The Gambling Act allowed bookmakers to advertise in the UK for the first time.
Charities have been critical of celebrities glamorising gambling through endorsements. The Australian cricketer Shane Warne promotes gambling to his one million Twitter followers through his @Warne888 handle – he signed a lucrative deal in 2008 with the 888 Poker group to represent the company at events around the world. Ray Winstone became the face of bet365 and regularly features at half-time during games urging people to "bet in play, now".