The increase in machine games duty announced in the UK budget this week, rising from 20% to 25% effective from April 1, 2027, has sparked varied reactions across the gambling industry. While this change has spared operators from the feared 40% rate suggested by the Social Market Foundation, it is likely to lead to significant industry challenges. Analysts suggest that shop closures, lower investment, and gains from weaker competitors will be necessary strategies to manage the higher tax burden.
Initial evaluations indicate that the duty increase will not severely impact the earnings of diversified gambling operators. However, for those reliant on physical locations, even a slight earnings downgrade could force tough decisions regarding site viability. David Brohan of Goodbody stated, "While a tax increase is never welcome, a 5% increase is at least tolerable, and should act as a clearing event for the sector."
Regulus Partners, however, cautioned that the increased tax represents a reduction in cash flow that could be detrimental to many marginal venues. The new duty affects machines with maximum stakes over £1 or prizes exceeding £100. The projected increase in revenue for the Exchequer is estimated at £135 million in 2027-28 and £130 million annually over the next four years, summing to £655 million over five years, as verified by the Office for Budget Responsibility. About 5,100 operators and 12,400 premises could be impacted.
Regulus challenged the notion that revenue is a suitable measure of affordability, pointing out that against an annual industry revenue of over £5 billion, the added £130 million in taxes represents about one-third of free cash flow after capital expenses, indicating a potential strain on finances. The estimated additional costs for different betting venues range widely – about £11,000 per betting shop, £20,000 for adult gaming centers or bingo arcades, £50,000 for traditional bingo halls, and £100,000 for casinos, revealing considerable variation based on venue type.
Entain, which owns Ladbrokes and Coral, plans to mitigate the effects of the tax increase, predicting an initial annual cost of around £25 million across UK and Ireland retail operations. The company hopes to fully offset this added burden by the end of 2028 through strategies such as estate rationalization and tapping into market-share increases. CEO Stella David emphasized the importance of protecting jobs while ensuring a sustainable retail presence on UK high streets, though she acknowledged that the new tax would compound challenges from previous tax hikes and potentially drive customers toward illegal gambling options.
Initial evaluations by banks reflect a more cautious outlook than Entain's optimistic mitigation strategies. Goldman Sachs predicted a 1.5% impact on Entain’s group EBITDA in 2028, estimating a 2% decrease in equity value. They pointed to potential offsets through shop rationalization and market gains, especially if smaller competitors struggle. However, retail operations have less room to cut promotional costs compared to online gambling.
JP Morgan's assessment forecasted a 3% average annual EBITDA decline within Entain and Evoke for FY2027, though mitigation is expected chiefly through the closure of unprofitable betting shops. This reflects the increasing reliance on self-service machines amid weaker economics for gambling machines. Entain’s retail segment accounts for around 22% of its FY2027 sales, with machines contributing roughly half.
In contrast, Rank's situation appears more severe, with estimated EBITDA impacts of about 5% for FY2027, compared to 2% for Entain. Peel Hunt reduced its FY2028 operating-profit forecast for Rank by £9 million due to unmitigated tax costs. Analysts assert that surrounding closures might provide competitive advantages to Rank’s remaining venues, suggesting an opportunity for improved returns on investments.
Regulus has cautioned that the implications of the tax increase may not become evident immediately. They anticipate that approximately 2,750 betting shops could close amidst rising operational costs and expiring leases, even considering that 1,000 might shut down independently of the new tax. This situation could result in 19,000 job losses and a £57 million drop in income for the racing sector from media rights.
The Betting and Gaming Council reported projections indicating that nearly 9,000 jobs could be lost, with about 1,000 betting shops and casinos facing imminent closure risk. BGC CEO Grainne Hurst called the duty increase a "deeply damaging decision." While there is some relief in the industry regarding the size of the increase and the elimination of uncertainty, the underlying reality is that the necessary closures and budget cuts will likely reduce the overall industry presence. The focus now shifts to how much of the Treasury's anticipated revenue will endure in light of these adjustments.
