Spread betting is gambling and all gambling is tax free on winnings because it is taxed by gambling tax, currently 3% on financial spreadbets, and paid by the spread betting providers. If the bookie pays 3% tax from its profits, the cost of paying that tax is presumably passed on within the spreads quoted to the clients. All the bookies’ profit comes from clients one way or another. So the clients (either all of them, or some more than others) indirectly pay the tax that the bookie is handing over.
‘I know that the spread betting companies say that it is a tax free product because it is classed as betting rather than trading, but do you have any knowledge of the tax mans view on spread betting for a living as a sole source of income?’
There is a lot of rubbish on the internet concerning spreadbetting and tax. Unfortunately even the spread betting companies don’t make clear what is a fairly straightforward issue. Before going on I would confirm that I have no legal, tax or financial qualifications so I only post this as my personal experience and research.
Spread betting has two major bits of government legislation. One states that winnings are not liable to capital gains tax and the other is that spread betting is regulated by the Financial Services Authority. There is no parliamentary legislation that refers to income tax on spread betting wins. So you pay no capital gains on spreadbet profits – end of story.
Income tax: All income should be declared for taxation assessment. It is not for you the individual to decide if tax is due to be paid or not. That is the job for the tax man. Some income may be exempt from tax, in which case your tax form will have sections where you claim exemptions such as allowances, pension contributions etc. There are a few other exemptions that are not made public on the tax forms and one of those is Gambling winnings. Winnings from gambling are tax exempt under most (but not all) circumstances. So it comes down to criteria for determining who is and who is not exempt.
HMRC refers to ‘trade’ as running a business – not to be confused with trading/investing. A professional gambler is deemed to someone whose gambling is considered by HMRC to be a trade (business). Businesses are not able to exempt themselves fron tax on gambling income. If you do any business activity producing income that is associated with gambling (spreadbetting) you could be liable for income tax on your gambling winnings. If you have a regular income from a source not associated with gambling such as a self employment, PAYE or a pension you cannot be classified as a professional gambler and so will not be liable to pay tax on winnings. It is irrelevant how much you win or how expert you are. HMRC are very reluctant to classify anyone as a professional gambler and it their decision alone – not yours. Keep this link safe or print it off: http://www.hmrc.gov.uk/manuals/bimmanual/bim22017.htm
In a Nutshell -:
I’ve had several communications with HMRC on spreadbets. The law states only that spread bets are not subject to capital gains tax. There is no reference to income tax under the spread betting directives. The popular misconception is that as spread betting is gambling it is not subject to income tax. That is not the case.
Gambling winnings fall into two categories -:
(1) Professional gamblers and
(2) Non professional gamblers.
In any case it is not for you to decide what category you come into. Only HMRC can make that judgement. Generally, if you are employed and pay PAYE you cannot be classed as a professional gambler and so do not need to pay tax on gambling winnings even if they exceed your employed income. HMRC are very reluctant to classify anyone as Professional Gambler because it means that you can claim against losses on all forms of gambling and against the spreadbet companies proportion of their gambling tax – lots of complicated accounting for them to audit for little reward. On a point of law all income should be declared to HMRC with details of where the income came from for them to decide whether you need to pay tax. In practice it’s a waste of every ones time declaring spreadbet winnings if you are employed.’
In any case I’m perfectly happy with the way it currently works, so I hope no clever chancellor decides to spoil it all. Every 18 months or so I call at my local tax office and ask if I can briefly chat to someone about whether I need to declare my spreadbet dealings/profits/losses and so far the various different accounting firms I’ve spoken with are content for me to not bother.
P.S: I do of course note the name of whoever I speak to, and post a letter thanking them for informing me that they require nothing from me. Just in case someone eventually decides I’ve been wrongly informed ;o)