The Tote, the government-owned bookmaker, is braced for a backlash over plans to move a portion of its business offshore and reduce its tax liabilities in the process. Despite being fully state-owned and operated since its foundation in 1928, the Tote yesterday admitted it plans to filter bets placed with third-party, offshore bookmakers through its Guernsey outpost in a move that would sidestep income tax.

The Tote operates through a pool betting system, where punters contribute to a central prize fund, and it allows customers of other bookmakers to bet into Tote markets. Negotiations are well advanced with a number of bookmakers to begin directing those wagers into central Tote pools via an offshore hub.

The potential for avoidance of income tax and payments to the Levy, the tax on bookmakers which partially funds the racing industry, is seen as an important carrot in the task of persuading bookmakers, who are themselves already avoiding gross profits tax, corporation tax and the Levy by basing themselves outside Britain, to remain loyal to the Tote rather than using other pool betting operators.

The British Horseracing Authority last night condemned the Tote's plans. Will Lambe, its head of external affairs, said: "This is further evidence of Britain's gambling regulations being in need of urgent attention. There is no level playing field for remote operators in this country, and it is deeply damaging, not least to government.

"While racing may not suffer from this development due to its special relationship with the Tote, other such moves are costing the sport some £10m a year."

Rupert Arnold, the chief executive of the National Trainers' Federation, said: "Whatever the strategic reasons may be for this decision, the Tote's contribution to racing is crucial to the future wellbeing of the sport, so at the very least we need cast-iron assurances on that score."

Tote Direct's commercial manager, Eddie Bennett, said he was "unable to talk about individual contracts for commercial reasons". Bennett also said he could not comment as to whether the government knew the Tote used tax avoidance as a negotiating tool with other bookmakers.

However, a statement was issued by the Tote's managing director of E-gaming and Totepool, David Craven, which said: "The creation of a Guernsey pool business is a defensive measure designed to prevent non-UK pool operators collecting the Tote's existing international pool business and thereby protect revenue to British racing. The Tote can absolutely guarantee that its contribution to racing will not be diminished by a penny as a result of this. Not only is racing's contribution protected, racing will be the beneficiary of any growth."

A spokesman for the Department for Culture, Media and Sport declined to comment last night.

A dramatic fall in Levy yield from £115m in 2007-08 to £76m in last year's scheme has forced racing to endure swingeing cuts across the board, most notably in prize money. The Levy Board last night declined to comment on the Tote's new arrangements.

The Tote contributes about £11m a year to the sport over and above its Levy responsibilities and is by some way racing's biggest race sponsor. The on-off saga of the Tote's proposed sale from state control over the past 10 years, now set to be completed by June this year, has led to underinvestment in new technology, which could threaten its position as the dominant player in the pool betting market, particularly abroad.

But the signing of new commercial agreements with other bookmakers that would encourage them to continue to promote Tote betting through Tote Direct rather than using another supplier or even doing it themselves, would presumably be seen as a positive move, whoever is confirmed later this year as the successful bidder.

The British Horseracing Authority said it hoped that its "special relationship" with the Tote would mean that the sport's overall balance sheet would not be affected.