Taxation
Hi,
My apologies for delayed reply. My hard disk packed up and I have taken a long time to recover it's data!!!
Herewith my analysis of the precedents. I put a summary of this to the Inland Revenue in April 2006 and have not yet received a reply. I chased them two days ago and was told they are still considering their reply.
TAXATION OF SPREAD BETTING PROCEEDS.
ALL gains or losses arising from any betting activity are outside of Capital Gains Tax computation.
Gains and losses from betting activity are outside of Income Tax (but not Corporation Tax) computation provided that the individual involved is not carrying out a trade or profession involving activities associated with the activity in which the betting takes place.
The first precedent to be considered is Graham v Greene, 9 TC 309 (1925).
Graham’s sole income for many years, apart from some bank deposit interest, arose from betting on horses from his private residence, with bookmakers. It was acknowledged that he carried out the betting with shrewdness on a large, sustained scale.
It was found that “Betting” in itself lacks the organisational element of a “Trade or Profession”, unless conducted by a bookmaker of course. There is no connection between one bet and the next. In this case, there was no trade or profession being practised which could link to the betting. (In fact there was no trading activity at all.)
The second precedent is Down v Compston 21 TC 60 919370
Here, Compston was a professional golfer who regularly engaged in rounds of golf with amateurs, on a handicap basis, playing for bets of various amounts. It was held that there was no link between the placing of the bets and the profession involved (professional golfer). This takes the reasoning in Graham v Greene one step further. It would also seem to support the contention that tax free betting can be conducted from elsewhere than the home, as was the case in Graham v Greene, but that probably does not include conducting the betting from an office specifically established for the purpose of conducting the betting activities.
The next precedent is Burdge v Pyne 45 TC 320 (1968)
Burdge was the proprietor of a club which provided gambling facilities, including card games, for members. He regularly played cards with the clubs members and regularly made a profit therefrom. His winnings were the main source of profit for the club, whose other activities were not very successful. This case differed from Graham v Greene in that there was an admitted trading activity which was within the tax computation, and it was held that the betting proceeds were liable for tax because the betting was on an activity directly involved in the trade of running the club. If the club had had no gambling facilities available for patrons, then the proceeds of the betting would not have been taxable. (The fact that betting on those premises would then have been illegal has no bearing on the taxation treatment - in the U.K. U.S.A. law is slightly different.)
SUMMARY.
Provided the spread betting is carried out by an individual, either in isolation or where there is a taxable activity not connected to stock market trading or any gambling activity, then it is outside of taxation computation. The amount of the spread betting activity is immaterial, as is the amount of effort and expertise acquired or utilised. One important matter here is the precise wording of the contract between the “Better” and the market maker or broker, because any indication therein that the person making the spread bets is a professional stock market trader would be very damaging to the tax exemption case. Fortunately, for other reasons, most such contracts stipulate that you must NOT be a professional trader.
If, however, the person carrying out the spread betting conducts any other activity which might be treated as a trade or profession and which is closely associated with the stock market, then the profits and losses arising from the spread betting will be taxed.
There is a very fine line involved here. If a person trades in CFD’s or Options, then the spread betting will definitely be caught. If a person buys shares as an investment, then that is NOT trading, but if shares are bought and sold frequently to make profits therefrom other than from the dividends, then that is trading. Each person’s circumstances will be treated in isolation by the Inland Revenue. You cannot rely on someone saying they have “Cleared it with the Inspector of Taxes.” You have to know the exact circumstances.
Also, if a person makes a living from commenting on or giving advice or training on share dealing, then that person’s spread betting dealings will most likely be taxable as part of his/her professional earnings. I can find no precedent where an employed person receiving a salary for stock market related services also takes part in spread betting. I tend to the view that spread betting conducted personally by an employee of, say, a stockbroking firm, would remain tax exempt, but if the same person also received fees, outside of his employment, for services related to stockmarket trading, then spread betting would definitely be drawn into the tax net.
Finally, it would seem that spreadbetting could not be exempt from tax unless conducted by an individual. Company and partnerships would be caught.
Compiled by:
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One specific comment for Visaria.
Yes, any trading activity is within the Inland Revenue's net. So repeated CFD or option trading would clearly be caught. (Occasional such activities would be covered under Capital Gains Tax provisions). Whether or not spread betting provides the sole income of a person is irrelevent. What matters is that persons other involvement with the activity concerned with the betting. I only mentioned the sole source point to emphasise that, as it was specifically dealt with as Ratio Descendii in the first case I mention. (That means it is binding on all subsequent cases unless reversed by a higher court). I personally think that judgement is technically flawed, but until the Inland Revenue take it to the House of Lords, the precedent remains. The Inland Revenue are, of course, fully aware that the vast majority of gamblers lose money, so they don't want to allow gambling losses to be set off against other income as they would be the net losers!!!
BTW the accountant you mentioned in 2002 obviously did not research the matter! Don't automatically think that accountants are tax experts. In fact, it is impossible for any one ondividual to be a "Tax Expert". The field is far too wide for one person to encompass. You won't get even a Tax Barrister to claim he is expert in more than a small portion of the entire Tax Legislation. If accouintants are honest, they will admit this. In the reverse scenario, I would not dream of putting myself forward as an "Expert Accountant" i.e I have only a scetchy knowledge of accountancy practices, although I do my own business computations without using an accountant. (I do have arrangement with an accountant I know very well whereby I phone him if I need and he does the same to me if he has a tax problem within my expertise.)
