In his Budget announcement on Wednesday, Chancellor George Osborne revealed that that the new Machine Games Duty will be set at 20 per cent.
MGD, which was expected to be set at a lower rate, is due to come into effect on February 1, 2013.
"One area where I am today making substantial changes is gambling duties," the Chancellor said. "The VAT treatment of gaming machines is being repeatedly challenged by operators in the courts.
"So I will introduce a new Machine Games Duty - with a standard rate of 20 per cent and a lower rate for low stakes and prize machines of 5 per cent of net takings."
According to Gareth Martyn, indirect tax director in PricewaterhouseCooper’s betting and gaming team, it is to have a “major impact” on the UK’s pub chains and leisure companies.
“For the leisure industry, this will almost certainly be the most significant announcement coming out of today’s Budget as many operators considered a revenue neutral MGD rate would be around 16-17 per cent,” he said. “Therefore the rate announced today could affect EBITDA at a time when many leisure businesses are already struggling.”
The government had previously indicated that the introduction of MGD was not intended to be a revenue raising measure, Global Betting and Gaming Consultants said in response to the news.
The company said that the industry will “struggle to understand” how a duty rate of 20 per cent marries with the government’s previous statements.
Small to medium-sized operators are likely to be hit hard by the costs of compliance.
“At this point, we are worried that the government is looking more and more like some continental European countries that are using the gambling industry as an ATM machine at the expense of jobs and innovation,” the company said.
BACTA president Derek Petrie warned that the "end for many amusement arcades is nigh," stating that the new tax would lead to a "cruel wave" of closures.
"Analysis by Ernst and Young has clearly shown that tax rates of 15 per cent and three per cent are the most that any owner can bear," he said. "Anything more, and the losers from this new regime face fresh tax bills in the hundreds of thousands of pounds. Arcade owners are doing everything they possibly can to grow their businesses and keep them thriving for seaside resorts.
"It is inconceivable that a government supposedly committed to small business and to tourism has made this decision. 300 arcades and 1,000 jobs have already gone, now, more will follow."
