Paddy Power Bookmakers will relocate its Internet betting operation offshore early next year to avoid Irish betting tax of 5 per cent, The Irish Times has learned.

The move will cost the Exchequer millions of pounds in lost taxes and follows Finance Minister Mr McCreevy's decision not to reduce betting tax in the Budget, despite intensive lobbying by Irish bookmakers.

The move is likely to be followed by a host of smaller Irish bookmakers and could prove a precursor to Paddy Power moving its lucrative telephone betting operation offshore.

Paddy Power managing director Mr Stuart Kenny said the company would make a final decision on the location of its Internet base by February. The Internet centre is likely to be based in one of several low-tax havens, with Malta and Jersey the front runners. According to Paddy Power, it made the decision in reaction to the Budget. Bookmakers had sought reductions in Irish duty to between 0 and 2 per cent. This would have allowed Irish bookmakers to compete with rivals such as William Hills, which offers tax-free betting from a low-tax base in Gibraltar. Mr Brian O'Farrell, administrator of the Irish Independent Betting Offices Association, confirmed several other independent bookmakers were considering offshore locations. "A reduction in betting duty could have attracted significant investment into Ireland," he said. Paddy Power's website generated €925,639 (£728,478) in sales from its 2,666 active customers in its first 10 weeks of trading to June 30th, 2000. Since then, active users have increased to 5,887 and revenues are almost certain to rise as the Internet increases in popularity. Moving its telephone arm offshore would impact even more severely on betting revenues. O'Halloran's Bookmakers, based in Youghal, Co Cork, relocated its Internet arm to Malta in August.

Shares in Power Leisure, the parent company of the Paddy Power bookmaking chain, have risen sharply on their first day's trading.

Institutions that subscribed to the placing at €2.40 (£1.89) a share are showing a gain of nearly 15 per cent, with Power closing last night at €2.75 after trading as high as €2.85 in the opening session.

Trading on the first day was light, with less than one million shares changing hands. At the close, Power had a market value of €129 million.