Skip to content

Impact case study

The Modernisation of Gambling Taxation

Unit(s) of assessment: Business and Management Studies

Research theme: Health and Wellbeing

School: Nottingham Business School


HM Customs & Excise (HMCE) commissioned Professor Leighton Vaughan Williams in 2000 to undertake a research project called ‘An economic analysis of the options for taxing betting.’ The findings demonstrated that a gross profits system of taxation (GPT), in effect taxation based on the stakes placed with betting operators minus winnings paid out, would result in lower prices for consumers and higher turnover for UK betting operators than would the existing tax structure which was levied on bettors’ stakes.

NTU has had radical impact on the modernisation of gambling taxation, with tax structure and rates directly informed by NTU research. The resulting Gross Profits Taxation replaced turnover taxation for betting and for gambling machines, leading to near doubling in UK tax revenue in 5 years to c. £3 billion a year, with total machine tax revenue of £3.87 billion collected (95.8% in the current REF period).

Other countries, including the USA and Australia, adopted the UK’s approach within the same period and uniquely delivered benefits simultaneously to operators, consumers, and exchequer. This resolved key policy tensions between industry and government, enhancing both public and private revenue.

Research background

The new system was shown to be optimal in terms of efficiency, equity, and the long-term protection of tax revenues as the new GPT tax system benefited all key stakeholders – the exchequer, the industry, and consumers.

Vaughan Williams was subsequently commissioned by HMRC and the Department for Culture, Media and Sport (DCMS) to lead a research project ‘Modelling the UK gambling market.’ As part of this he derived estimates of elasticity for different gambling activities, examining the responsiveness of the demand by consumers to changes in price.

His research on the theoretical framework underpinning the switch to the GPT system and gambling machines (i.e. on the responsiveness of tax revenue to tax rates), was a development of work he conducted between 2006 and 2009 for HMRC and was published in 2013. The work was later extended and expanded, with the switch to gross profits tax on gambling machines, initially in 2013, but followed by tax rate adjustments based on his research in subsequent years. Collectively these research projects evaluated the competition between conventional gaming machines and the relatively new fixed odds betting terminals (FOBTs) and provided empirical estimates of the impact of FOBTs on other gambling machines in the UK.

There was no significant evidence that FOBTs displaced conventional gaming machines except in licensed betting offices. In 2016, Vaughan Williams produced a further unpublished report commissioned by HMRC, titled ‘A Consideration of Fixed Odds Betting Terminals and Part III Machines’, which compared structural and functional characteristics of different types of gambling machines, and considered the implications arising from this for tax equivalence and fiscal neutrality for use in the HMRC policy costing model.

Vaughan Williams, Garrett and Paton (2020) and Garrett, Paton and Vaughan Williams (2020) finalise and formalise the theory relating to the responsiveness of tax revenues to tax rates as well as well as updating the evidence base to cover the period since the end of 2013.


The HMRC tax model and Machine Games Duty

The introduction of the gross profits tax system for gambling machines in 2013, based on Vaughan Williams’ research, has generated significant increases in government tax revenue as well as a marked improvement in industry profitability and viability, the vast majority of which has occurred since August 2013.

These changes led directly to an increase in the number of machines in operation, and a total tax yield from Machine Games Duty between 2013-14 and 2018-19 of £3.87 billion.

In this way, the shift to a gross profits system of taxation of gambling machines resolves a key policy tension between industry and government over the sustainability and growth of tax revenues versus industry profitability - namely, the enhancement of both public and private revenue. Notably, and most unusually, the tax changes delivered benefits of major scale simultaneously to operators, consumers, and the exchequer. The HMRC model, and updates of the model on which the tax changes were based, were uniquely informed by Vaughan Williams’ work for HMRC and DCMS.

The setting of the level of Machine Games Duty was also based on this model, and related tax policy developments, impacting other sectors, were based on the model. It was also used to estimate for policy purposes the likely consequence of subsequent duty changes.

Extension of the gross profits tax system

Between the tax year prior to the implementation of this extension in 2014, and 2018-19, general and remote betting duty receipts increased from a total of c. £365 million a year to c. £1.15 billion a year, a total increase of c. £2.4 billion. In aggregate, there was a near doubling in tax revenue to c. £3 billion a year. A gross profits-based system of gambling taxation levied at point of consumption was implemented in South Australia in 2017. They used the research findings of Vaughan Williams, notably on demand elasticities for gambling, in setting rates of betting taxation.

In 2019, the two most populous Australian states, Victoria and New South Wales, followed South Australia in implementing this system of taxation. In May 2018, the US Supreme Court declared a national ban on sports betting unconstitutional and a matter for individual states. As of November 2020, legal sports betting became available in 19 states, plus Washington DC (with six more in process) all based on the methodology employed by Vaughan Williams in his research for HMRC. New entrants have implemented a gross profits system of betting taxation, mirroring the UK, at rates broadly parallel to the rate on sports wagering introduced into the UK. This was noted in a report commissioned in anticipation of the legalisation of sports betting across the USA.


  • Paton, D., Siegel, D.S. and Vaughan Williams, L., (2002). A policy response to the ecommerce revolution: the case of betting taxation in the UK. Economic Journal, 112 (480), pp. 296-314.
  • Paton, D., Siegel, D.S. and Vaughan Williams, L., (2004). Taxation and the demand for gambling: new evidence from the United Kingdom. National Tax Journal 57(4), pp. 847-861.
  • Vaughan Williams, L. and Paton, D. (2013). The Taxation of Gambling Machines: A theoretical perspective, in Vaughan Williams, L. and Siegel, D.S. (eds.). The Oxford Handbook of the Economics of Gambling, Oxford University Press, New York, NY, pp. 692-700.
  • Vaughan Williams, L., Garrett, T. and Paton, D. (2020). Taxing gambling machines to enhance tourism. Journal of Gambling Business and Economics, 13 (2), 83-90.
  • Garrett, T., Paton, D. and Vaughan Williams, L. (2020). Taxing gambling machines to enhance public and private revenue. Kyklos, 73 (4), pp. 500-523.
  • Paton, D. and Vaughan Williams, L. (2013). Do new gambling products displace old? Evidence from a postcode analysis. Regional Studies, 47 (6), pp. 963-973.