Funding bombshell: racing hit by shock £17 million fall in levy income
British racing's leaders have launched an urgent plan of action after receiving the bombshell news that income from the levy – the sport's central funding system – has fallen unexpectedly by £17 million to £78m in the latest financial year.
The Levy Board has proposed that expenditure this year will have to be cut by £5m, with most of the reduction likely to impact prize-money, with the possibility of more cuts to come.
That unwelcome news, which was confirmed following a Racing Post report, comes against the background of the sport facing falling income from media rights caused by betting shop closures due to the government's crackdown on FOBTs.
The effect of that change has been estimated at £40m-£60m a year.
Bookmakers pay a percentage of their gross profits on bets on British horseracing to the levy, which the government reformed in 2017 to extend to operators based overseas who had previously not contributed.
Having fallen below £50m, the newly-reformed levy brought in £95m in its first year, higher even than the forecasts of £85m.
A spokesman for the sport's tripartite leadership comprising the BHA, racecourses and Horsemen's Group, said: "We were shocked to see the big drop in levy yield for 2018-19, which was significantly below the previous forecast at the end of March.
"We share the disappointment that our sport will feel having produced some highly competitive and compelling racing over the past year.
"The bulk of the levy income is distributed as prize-money. At a time when there is already significant debate in the industry around levels of prize-money, we appreciate that any potential reduction will cause further concern. Racecourses, the Horsemen's Group and the BHA have pledged to work through any implications together. Discussions have already begun about how to minimise the impact over the next year."
The Levy Board said the main impact came towards the end of the levy year, which runs from April 1 to March 31. A forecast made before that point had estimated the levy would yield £89m.
Levy Board chairman Paul Lee said: "Bookmaker profits in the fourth quarter, particularly in February and March, were reported to be very substantially down on estimates."
Bookmaker promotions around the Cheltenham Festival and results on the track will have had a major effect on the yield, but the sport's leadership will be concerned that this is a structural change rather than a one-off event.
Racing Post figures found that a £1 bet on every favourite in January to March would have resulted in a 2.62 per cent loss on turnover compared to figures in the previous three years ranging from 5.91 per cent to 6.64 per cent.
While last year's Cheltenham Festival is understood to have been unusually profitable for bookmakers, results swung to the other extreme this year.
This week Sky Bet's parent company The Stars Group said the bookmaker's revenues had been hit by unfavourable results at the festival, with betting net win margin at a record low of five per cent in the first quarter of the year compared to an average of around nine per cent.
Competition to attract punters was also notably cut-throat in March with, for example, operators like Sky Bet offering money back as cash for losing bets rather than as free bets.
The equine flu crisis, which shut down racing for six days in February, will also have had an impact, although 2018's schedule was hit by the 'Beast From The East' at the beginning of March that year.
The news threatens to reopen the divide between racecourses and horsemen over prize-money, which was closed when the Levy Board announced a one-off injection of £6.5m to fill the hole expected to be left in racecourse coffers by falling media rights income this year.
Courses including those under the Arena Racing Company (Arc) umbrella, had signalled their intention to cut prize-money in 2019 in response to the threat of falling income, a move which in Arc's case led to trainer and owner boycotts.
When the government reformed the levy it said it would consider extending the system to bets placed on foreign racing, a move which could bring in a further £15m-£20m.
However, ministers have said they would need to see racing make self-help efforts and also evidence of hardship before that change was made.
Many in the sport would also like to move towards a levy model based more on turnover to mitigate against bookmakers using the sport as a loss leader.
The spokesman added: "The government and parliament have been very supportive of British racing making important and welcome changes to the levy in 2017.
"Like us, they have been waiting to see how these reforms would bed in and what the impact would be on racing's income. We will discuss this with ministers and officials at the next opportunity."
Responding to the news, a DCMS spokesperson said: "We absolutely recognise the significant contribution that horseracing makes to the British economy. In 2017 we acted to future-proof the Horserace Betting Levy by extending it to offshore bookmakers for the first time – generating an extra £45 million in statutory levy income in 2017-18.
"Levy income fluctuates annually depending on results, but we remain confident that the reforms are sustainable and provide a firm foundation to support the sport.
"We have committed to reviewing the levy by 2024. In the event that significant market changes occur, we will consider bringing this forward to ensure the sport continues to thrive."
Comment: unwelcome news raises many questions
British racing already knew it was likely to be facing tough times and hard decisions, but the news from the Levy Board is as concerning as it is unexpected.
The sport knew it faced the prospect of shrinking income from betting shop media rights, but the silver lining had been the boost to the levy from the government's reforms two years ago.
Those reforms produced an extra £45m for racing's coffers in their first year, but that figure has now fallen by an astonishing £17m.
The question is whether one or both of the figures were freaks and what has caused the violent fluctuations.
The extension of the levy to online operators based offshore is central to this issue, with their lower profit margins and fierce competition making estimates hard to get right.
There is no evidence to suggest the changes have been caused by a sudden fall in racing's popularity with punters. It is down to a system based on bookmaker's gross profits.
Racing has long complained about bookmakers using racing as a loss leader to draw customers in and direct them to other products.
The government said the changes to the levy would ensure a "fair return" to the sport. Many in the sport will question whether current arrangements guarantee that fair return.
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