BOOKMAKERS are avoiding paying tax on more than €1.7bn of bets annually in an "offshore betting scheme" that puts cross-border shopping in "the ha'penny place", according to industry insiders.

Although the bookies, which include Paddy Power and Boylesports, are not breaking the law by processing bets on computer servers in the Isle of Man to avoid paying betting tax, the practice has caused a major divide between the larger operators and smaller independent outfits.

"If you thought shoppers crossing the border were the only contributors to Ireland's overseas spending spree, then they are only in the ha'penny place with the amounts being gambled by Irish punters offshore," said Jimmy Finlay of Bambury Bookmakers.

"A huge betting splurge is being orchestrated, promoted and facilitated by some of Ireland's largest and best-known bookmaking firms."

Finlay, like other smaller bookmakers, processes and records all bets taken from his customers at his headquarters in Ireland and pays Irish betting duty.

"Irish racing will be a major sufferer if more betting is diverted offshore as racing relies on the betting tax to fund its operations," he said.

The offshore "scheme" has been going on for many years with significant revenue loss to the state. Brian Kavanagh, chief executive of Horse Racing Ireland, has claimed the racing industry, which employs more than 16,000 people, is "creaking at the seams" in the recession and says the government needs to introduce new legislation to tackle the offshore betting scandal that could cost the exchequer €34m in the next year.

The body had its government funding cut recently and plans for the redevelopment of the Curragh racecourse have been put on hold as the industry is hit by the recession.

"The betting market has expanded hugely in the past few years. In 2001, €1.3bn was spent on betting in Ireland and the state got €68m in taxes from that. Last year, €5.5bn was spent on betting and the government got just €38m in taxes. That is the nub of the problem," said Kavanagh.

"Once a punter strikes a bet in Ireland, the tax from that bet should be paid to the Irish government. We are working with the government on this. From 1 May betting tax goes up from 1% to 2% and this could encourage more businesses to move their betting offshore. We need to look at a legislative means to tackle the offshore betting."

Cormac Barry, head of online betting at Paddy Power.com, defended the practice.

"Our view on this is that if they were to bring in a tax on phone and internet betting this would be a tax on jobs and place us at a significant disadvantage," he said.

"Seven out of the 10 top players in the Irish market have no presence in Ireland. They provide no employment and pay no tax. In 2007, we paid €15m in tax on our non-retail business through a combination of corporation tax, VAT and employers' contributions. If the government applied the 2% betting tax to online betting, it would threaten 550 jobs in Tallaght," Barry claimed.

Daniel O'Mahony, chief executive of Boylesports, echoed Barry's views.

"We employed 12 people in our online operations five years ago and now we employ over 200," he said. "Companies like us and Paddy Power are creating jobs in Ireland so we should be applauded and not accused of avoiding paying tax, as our other taxes outweigh the betting tax.

"Up to December 2008, our total tax paid to the state was €21m including betting tax, PRSI, VAT and corporation tax."

How offshore betting works

AN Irish punter fancies placing a bet so they go online or phone in their bet to the 'telebet' centre of one of the larger betting companies based in Ireland, such as Paddy Power or Boylesports.

When the client rings in their bet or places the bet online on the bookmaker's website, the bet is accepted by staff at the bookmakers. The bet is then sent electronically to a server in an offshore base where the bet is struck.

As it is struck offshore, there is no liability for Irish betting duty in Ireland and the bookmaker avoids paying the 1% betting tax.

As the government announced in the October budget that it would double Irish betting tax from 1% to 2%, from 1 May, bookmakers will now avoid paying even more tax via the offshore betting shelter.

Horse Racing Ireland believes up to 33% or €1.7 billion in gambling turnover leaves the state and no Irish betting tax is paid on it. This turnover is made up of telephone betting, online betting and online gambling activities such as poker and casinos.

It is important to point out that the bookmakers are not breaking the law by using the offshore betting shelter but it is costing the exchequer up to €34 million annually, when the betting tax is doubled to 2%.