Spreadbetting - gambling, trading, or investing

[Maslins]

Ok, recently had second person effectively ask me this, so obviously it's not that rare a situation.

Is spreadbetting (be it derivatives, currencies, whatever) gambling (hence non-taxable) trading (hence subject to income tax) or investing (hence subject to capital gains tax)?

I initially thought HMRC considered it to be gambling. A Google search seemed to support the view that there was no tax due whatsoever on any gains...but on a technical thing like this I appreciate a Google search isn't 100% reliable...like Wikipedia! I perhaps understand the logic, that for your typical hobby spreadbetter, it's not much different to betting on horses. You win some, but you lose quite a few as well, and HMRC didn't like the thought of everyone offsetting their "gambling" losses against their earned income.

But...met a few people who obviously have some kind of complex system which is enabling them to consistently make a profit. It's consistent enough over a long enough period of time, that it's not simply luck. On that basis, I think HMRC would want to argue it was no longer gambling.

So...my next thought is that it's trading. The transactions are very frequent, typically things only being held for a matter of hours at most. Certainly not a long term investment from an outsiders point of view.

But the guy I just met was sure he'd read somewhere on a subscription payable spread betting site that it was considered investing and CGT applied. I couldn't personally see the logic of this given the tiny length of time the assets are held.

Has anyone had any real experience with this? Be interested to hear your thoughts. :|

 

[David Griffiths]

I've always understood it to be gambling, and therefore not subject to tax.

 

[Maslins]

I've always understood it to be gambling, and therefore not subject to tax.

So on that basis people consistently making fairly large sums of money from doing it full time pay no tax...and perhaps they can even claim various tax credits etc as they have no income (their "winnings" not being counted)?

I have to admit a lot of what I've found on Google seems to support that view, I just struggle to imagine an HMRC inspector agreeing with it when he visits the guy in his huge house with Ferrari outside!

 

[RAL]

Have read on BIM 22015 . It defines what is trade and gambling.

 

[Maslins]

From BIM22015 "The taxpayer placing a spread bet is not normally carrying on a trade (see BIM22020 for exceptions). They are not taxable on the profits, nor do they receive relief for their losses."

From BIM22020 "To be taxable, the spread betting wins must come not merely from an opportunity presented by a trade, they must arise from the carrying on of that trade. Whether or not a particular spread bet is taxable will depend on the terms of the contract and the economic substance of what is done."

My interpretation of that is that if you do something else for a living, which makes you realise a bit of cash could be made from a certain spread bet, it's not a trade. But if what you are doing day in day out is spread betting, then it is a trade...

I appreciate in BIM22015 it also effectively says that the business offering the bet (ie the broker) is running a business, so perhaps that's what 22020 means by "the carrying on of that trade"?

Seems pretty ambiguous to me. Does anyone actually have clients who do this for a living? Or perhaps not because as it's gambling the people concerned have no needs for an accountant?! This is the second person in a few months who's basically an ex city trader, with a big redundancy, looking to go into this on their own, and they both felt the need to visit an accountant...

 

[elaine@cheapaccounting]

I think you will have to take a gamble with the treatment of this one

I soooo will not give up my day job

 

[Zeno]

I share your confusion Chris. I have been approached by a couple of people asking the same thing over the last few years.

Up until now i have held the view that over the long term, say 5 years they do not actually make any money however further research shows this may not be the case.

My understanding of spread betting is that it is effectively just day trading but with the important difference being that no securities etc actually change hands. It is all notional (not quite for fun as cash is involved...) which is why I understand it to be niether trading or investing.

I also cannot see HMRC loving the situation but I can't see what they can do.

Also, would this qualify as work for WTC purposes?

 

[CassioAcc]

I do know of someone who trades for a living and decided against spreadbetting due to the margins that are charged, so perhaps anyone that is trading for a living will be using established brokers. I'll look forward to that conversation next time we meet up.

 

[Maslins]

Well, like I said it's the second guy I've had in ~3 months. Both were proper city players on big salaries and got made redundant (BIG redundancies), both now think they can make an impressive living through spreadbetting (and I'm convinced they can).

The first guy decided to go with another accountant, but I do know for certain that he setup a Ltd Co to put the "trades" through.

The other who I spoke to a couple of days ago spoke to HMRC shortly after our meeting. They apparently told him HMRC's view was it was gambling. He'd already registered as self employed a few months back, and was told to deregister as he was not trading. I just told him to keep a detailed record of who he spoke to and when, so if HMRC change their mind in a few years when he's driving around in his Porsche they'll struggle to hit him with big penalties.

I did suggest (jokingly) to look at tax credits as even if he does well he'll have no earnings as far as HMRC are concerned!

Shame for me, as it means he has no need for an accountant!

 

[fathippy]

My take as someone who has both succesfully spread-bet and gambled at times in the distant past, is that there is no catch-all answer and that the revenue will use subjectivity on a case by case basis. It is a similar situation to where selling your own car or bric a brac is not a business, but doing it with alarming regularity makes it become so. Another example from my distant memory is serial developers who "move house" every three months to take advantage of personal allowances. Again, if the revenue suspect and can show that this is for all intents and purposes a business, they can claim tax from it.

I think you start on the basis that the product is tax free, however if you do it regularly enough, there may be a case that you are earning a living from it. This sort of argument I have definitely seen applied to good old fashioned betting (sports betting/horses etc), but I am not aware of too many times when HMRC have suceeded. The problem lies with the burden of "proof".

Therefore I think if you can show that you have a "proper" job, and/or a different source of income, then they will accept that. Or if you can convince them that it is not a regular thing (ie I had a good three months) and that you have now stopped, all these things put up obstacles.

In short, whilst the idea is sold as tax free (even though a lot of that refers to the lack of stamp tax!) I think it is dangerous to assume that it is a carte-blanche to do as much as you want and remain untouched.

 

[Maslins]

Therefore I think if you can show that you have a "proper" job, and/or a different source of income, then they will accept that. Or if you can convince them that it is not a regular thing (ie I had a good three months) and that you have now stopped, all these things put up obstacles.

In short, whilst the idea is sold as tax free (even though a lot of that refers to the lack of stamp tax!) I think it is dangerous to assume that it is a carte-blanche to do as much as you want and remain untouched.

These two people are openly saying they don't have a "proper job", and that their full time "job" is spreadbetting, day in day out, working from home. This latter guy stated exactly that to HMRC and was told it's gambling and he should deregister as self employed.

 

[fathippy]

he probably ought to get that in writing. I would guess he has recieved unsubstantiated opinion from a junior phone clerk. I am not saying he may not get away with it, but I would warn against claiming that the whole concept is untouchable.

As far as I can see, as long as the revenue can show that something is a business, provides an income, or would appear to the man on the clapham omnibus to be a job, then they are entitled to ask for a portion.

The other question I suppose you could ask is whether they would want to go after these sorts of people for political or other reasons, but I think you can safely say in the current environment that they will go after anything they can get.

For what it is worth, the whole argument could be simplified by just outlining an annual allowance for gambling income, based on a combination of a net amount of profit and the same as a percentage of total income. Reason being that if you for example said it was tax free up to the first £50k, then some multi-billionaire would complain that he wouldnt bother betting for less than that amount, but then he would fall under the other threshold - ie that this was less than X% of his total income - where X could be as much as 50 - ie as long as you earn the majority of your income elsewhere, gambling gains are exempt.

 

[frauke]

Spreadbetting is gambling. But there is also CFD trading. It is very simpular to spreadbetting, but instead of "betting" on the movement of a share, CFDs are trading contracts of shares using "leverage". CFD trading is taxable under CGT.

I used to have a client who until he moved to the US, was a self-employed trader - trading CFD's. But this was because he did it full-time as a trade.

I currently have a couple of clients (with other self-employed businesses), that trade CFD's until they reach the CGT allowance amount, and then switched to spreadbetting as this was not assessable for tax as it is considered gambling.

 

[Zeno]

If you derive you income entirely from gambling (spreadbetting but equally horses etc) then does this mean that your "official" earnings are nil?

Are you basically regarded as unemployed?

I assume the downsides are a deficit in NI contributions at some point and the inability to get any form of loan (I would hope) but would you still qualify for benefits etc?

 

[David Griffiths]

You could pay Class 3 voluntary contributions to maintain pension rights, if you needed to. Not sure what other benefits they would entitle you to.

 

[mr. mischief]

The UK is probably the best tax jurisidication in the world for successful punters. I've made £10k a year on average since 2002 on sports and financial betting. There is no tax to pay as long as it is not your sole or main income.

I used to be in a team of bettors. One based in the Midlands was full-time and making a minimum of £70k per year tax-free. His solution to the "sole or main income" thing was to spend £50k per year on rental properties, the last I heard from him he had 14 of these but about to lose 7 due to divorce. From a tax point of view he was a full-time buy to let landlord and property developer and just a lucky punter on the side.

However, another member of the team was based in the USA where it is very different. As a bettor you have full responsibility to disclose all your winnings and maintain records of any expenses you are going to deduct.

Another member was based in New Zealand and although things were nothing like as bad as the States it was not tax-free like it is in the UK.

So if your punters are based in the UK you can tell them how lucky they are!

 

[Zeno]

There is no tax to pay as long as it is not your sole or main income.

Could you explain what you mean by this?

 

[mr. mischief]

There have been various tax law cases where the proceeds of successful speculators have been taxed as earned income. The one I remember involved trading in silver where the trader had nothing else that he was doing at the time. No doubt some of the tax accountants on here can help better with that.

The internet has greatly reduced the costs of betting and hence increased the proportion of punters who are making profits not losses. There have been a few guys who've posted up on betting fora that the IR are coming after tham under the "sole or main income" provisions. I could be wrong about this but I think all of these have been settled out of Court so the legal situation in the UK has yet to be fully tested.

This has not been a problem for me personally until recently as I've been full-time employed and the betting profits have just been a bit of bunce. Some guys do DIY on their spare time and mess up their homes, I punt and bring in some extra cash.

I wsa made redundant in April and jobs in my field and locality are thin on the ground. So I plan to set up my own business. I've wanted to do this anyway, but it will act as a tax shield by being my "sole or main income".

 

[Zeno]

As far as I understand it, there is the proceeds of gambling are not taxable in the UK with the exception of where such gambling amounts to an organised activity.

RAL has provided a link to BIM22015 which goes into some detail regarding this but to summarise a key point - A person can be a "professional gambler" in that they can derive earn their living from it without it amounting to a trade and thus being taxable.

 

[David Griffiths]

There have been various tax law cases where the proceeds of successful speculators have been taxed as earned income. The one I remember involved trading in silver where the trader had nothing else that he was doing at the time. No doubt some of the tax accountants on here can help better with that.

But that was a case about whether the taxpayer was trading, or undertook a venture "in the nature of a trade", both of which are taxable. The courts would look at the "badges of a trade" (See here) in considering their verdicts. These usually applied where the taxpayer made windfall profits and tried to get out of paying tax. Whether it was the only source of income wasn't relevant.

Gambling isn't trading, so simply wouldn't be dealt with in the same way. The problem for the Revenue is that if they start to treat gambling as a trade, they will be hit with loss claims from the losers, and as there are more losers than winners it would become a tad expensive,

There was a similar case, with rather less glamourous products traded. Rutledge v CIR (1929) was concerned with a taxpayer who had purchased and sold a million toilet rolls - apparently a bit of novelty in those days - and claimed that it was a one off and not trading. He lost.

 

[Maslins]

I'm surprised HMRC don't try the same argument they do with sportspeople/musicians.

If you make money out of it, it's a trade, hence taxable.

If you lose money, it's a hobby, hence you can't use the loss against other income.

 

[mr. mischief]

There are definitely internet gamblers - at least one poker player and one sports bettor - who have posted on gambling websites that the Revenue were pursuing them for UK income tax. Try keying in gambling and UK tax to an internet search.

I also happen to know that one or 2 arbitrage punters have been pursued by them. Arbitrage is somewhat different in that the normal risk you are exposed to - whether your team or player wins - is reduced to zero, albeit replaced by other much lesser risks if the bookies concerned have different rules and the match does not complete due to retirement, postponement or a pitch invasion - or 14 Grand Prix cars not bothering to start the race, which created massive windfall gains and losses for arbers worldwide.

"Arbing" is in its nature more akin to a "normal" business in that the risk of large speculative losses is minimal and it is in effect a cash cow with zero overheads. I do the odd arb myself when I can see really good odds but still don't fancy the bet for whatever reason.

Most pro arbers have got some sort of tax shield such as buy to letting for that reason. Getting back to the tax, I believe all or most of these unlucky punters have handed over some of the tax claimed rather than risk the time & expense of a Court case.

 

[David Griffiths]

HMRC Manual: Gambling Not a trade even if you make a living at it

HMRC Manual: Element of existing trade. Can be taxable if it's connected with an existing trade. Even a golf professional betting on games of golf wasn't taxed on winnings.

HMRC Manual: Spread Betting Same principles apply

It's not unknown for people under tax investigation to claim that accumulations of cash have come from gambling winnings. The Revenue tend to take this with a pinch of salt and require further evidence, or they will assess it as profits of the taxpayer's business. There are numerous stories of people claiming to have won the money on the horses - the Revenue actually have specialists who can talk to you to see if you know anything about racing! People have also shot themselves in the foot in other ways - claming to have kept the cash in a shoebox for example, when the Revenue can prove that the sum in question wouldn't fit in a shoebox. They've heard it all before. Perhaps the claims made by the Revenue aren't for gambling winnings, but for diverted cash takings?

 

[mr. mischief]

Clearly some tax inspectors have taken a different line from the manual. I look at it this way, a lot of pro bettors will be in a similar position to me if I just carry on betting and do nothing else.

For 23 years I have been a sitting duck cash cow for the Revenue, paying PAYE and NI on all my earned income on a salary. Then in April there was a sudden windfall profit for them from my redundancy, followed by nil, nil, nil, nil.

At some point they are going to start asking exactly what I am living off. The people I know of who have been chased by them have been under 30, so they can hardly say they've been really good savers for 20 years. Maybe they should not have paid anything.

Rightly or wrongly, the general approach from successful pro arbers and gamblers is to declare some tax on something else such as rental income, and hence avoid all those awkward questions.

 

[fathippy]

The problem for the Revenue is that if they start to treat gambling as a trade, they will be hit with loss claims from the losers, and as there are more losers than winners it would become a tad expensive,

Whilst I can appreciate the surface logic of this, I think reality paints a different picture. Clearly those whom the revenue would claim are career gamblers must be profitable over time to make it a worthwhile occupation. It would be difficult for anyone to claim they were a professional gambler with repeated or net losses - that is nonsensical. Therefore the losers you refer to must, by definition, be casual and hence unable to claim.

I think the counter argument on this thread is not that gambling is taxable, which it clearly isn't, but that it is not unconditionally tax free. I still believe that in the grey areas, where HMRC can use its subjectivity and "big picture" approach, there may be cases to answer for.

Another way of looking at this is asking "is there a loophole" if gambling was unconditionally tax-free, and there clearly is. All it would take was a number of full time investors/speculators to set up a central dealing station where all trades and positions were held, which in turn laid the bets, for a large chunk of taxable income to disappear overnight.

 

I did a serious amount of index spreadbetting some years ago, I understood it to be gambling, when asking for a professional opinion.

And the argument on loss is interesting. An oft quoted stats to some extent confirmed by the spread houses is over 80% lose

 

[mr. mischief]

The figures are that roughly 20% of spread bookie customers are making money, and roughly 5% of traditional bookies' customers. The difference is mainly due to the higher margins built into the bookies' odds.

Traditional bookies are very aggressive towards profitable customers and after you beat them for a few months you get your maximum stakes cut to £5 with Hills, Ladbrokes and so on. US and Australian bookies are more tolerant of winners.

What this means is that 90% of your bets are not in your name, but in the name of friends and relatives. I estimate that I will be 105 before I have gone through all of my friends and relatives and have no-one else left to bet through.

So I reckon the tax folk would have a tough time identifying the true extent of my profits, it's hard enough for me to keep track of all of the accounts I have. Currently I am using 38 worldwide - UK, Europe, the Carribean, Asia, Australia - but I have another 76 which I have used at some point but which are now useless to me because they have £5 max. bets on all sports, or similarly small bet sizes.

 

[luckystrike23]

I'm surprised HMRC don't try the same argument they do with sportspeople/musicians.

If you make money out of it, it's a trade, hence taxable.

If you lose money, it's a hobby, hence you can't use the loss against other income.

this won't work because 80% of spreadbetters / day traders lose money - it is better for the HMRC for the providers to pay duty. -> http://www.financial-spread-betting.com/Tax-free.html

 

[westbeginner]

Does anyone know if it is legal to place a bet for someone else and if so is it legal to charge them a fee?

 

[mikey101]

West - given that this is a UK site, I presume you're from the UK as it will vary across different jurisdictions, but gambling broker sites for high net worth customers exist in the UK, so I assume it is possible.