uk tax laws on forex

This is a discussion on uk tax laws on forex within the Forex forums, part of the Markets category; Originally Posted by reza_trade Hi folks, Can anyone comment on this part form HMRC? Does "Whether or not a particular ...

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Old Nov 5, 2012, 8:44pm   #57
 
malaguti's Avatar
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Re: uk tax laws on forex

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Originally Posted by reza_trade View Post
Hi folks,
Can anyone comment on this part form HMRC?
Does "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" means HMRC can interpret this as trade if they want or what?

I am newbie and really want to know does it worth to deal with all these obstacles in order to make some money which you are not 100% sure or just scratch it all?

Thanks
"the terms of the contract" as far as HMRC are concerned, a spread bet is exactly the same as a CFD if the bet is entered by a company. Not so an individual for which profits are tax free if its not your sole profession. So the terms of the contract, meaning the contract for difference, in which case gains are taxed accordingly.
If you spreadbet in your own name, you will be fine as long as you have another paying income. Thats your only obstacle to contend with. That and actually making money from it of course!
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Old Dec 27, 2012, 6:21pm   #58
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Re: uk tax laws on forex

Here's my input-just spoke to an accountant who specialises in fx trading and tax.

Most important thing to realise is: you will get taxed. if you're spreadbetting, if you're making 1 or 2 k per year then who cares, even if it is your sole income. In fact, you'll be fine up to the threshold where income tax starts to kick in at £8,105.If you're nowhere near that figure then relax.
If you do exceed that figure, then you'll be liable for tax IF IT'S YOUR SOLE INCOME i.e. you're doing it on the side. It's simple. I'm guessing that most spreadbetters here aren't earning more than £8k per annum (apologies if you are).

To everyone else, then we have to pay tax. We don't like it, but deal with it. if trading is your sole income, then it actually is better to be taxed under CGT-here's why.

If you don't have any other CGT profits for the year, then the first 10,600 is tax free. The next band up to approx £35k is taxed at 18%. Then everything after that is charged at 28%. However, this is affected by your income tax rate, it could be that you're taxed the full 28% straight away if your tax band is high enough

So if you make 100k per year-first 10k is free, next 25k is taxed at 18% (if no other income) or 28% if you're a higher rate tax payer, and then after 35k it's 28%.
But even if you got taxed at 28% after the first 10k, that's still pretty damn good. Why? Because if you are classifying it as income, then anything over 34k is taxed at 40%. I can't be bothered to do the maths but that hurts. You'll also most likely have a ltd co set up, have accountants fees etc. of course you can write costs off against income, but damn-who would prefer a flat rate of 18-28% where you know where you stand with it, or having it tied up in ltd cos and all the record keeping?

Of course, it all boils down to one thing. Are you a speculator or an investor? I, for one, have no idea. Have read loads and am still no closer to an answer...
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Old Jan 5, 2013, 1:46am   #59
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Re: uk tax laws on forex

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Originally Posted by bootsyjam View Post
Here's my input-just spoke to an accountant who specialises in fx trading and tax.

Most important thing to realise is: you will get taxed. if you're spreadbetting, if you're making 1 or 2 k per year then who cares, even if it is your sole income. In fact, you'll be fine up to the threshold where income tax starts to kick in at £8,105.If you're nowhere near that figure then relax.
If you do exceed that figure, then you'll be liable for tax IF IT'S YOUR SOLE INCOME i.e. you're doing it on the side. It's simple. I'm guessing that most spreadbetters here aren't earning more than £8k per annum (apologies if you are).

To everyone else, then we have to pay tax. We don't like it, but deal with it. if trading is your sole income, then it actually is better to be taxed under CGT-here's why.

If you don't have any other CGT profits for the year, then the first 10,600 is tax free. The next band up to approx £35k is taxed at 18%. Then everything after that is charged at 28%. However, this is affected by your income tax rate, it could be that you're taxed the full 28% straight away if your tax band is high enough

So if you make 100k per year-first 10k is free, next 25k is taxed at 18% (if no other income) or 28% if you're a higher rate tax payer, and then after 35k it's 28%.
But even if you got taxed at 28% after the first 10k, that's still pretty damn good. Why? Because if you are classifying it as income, then anything over 34k is taxed at 40%. I can't be bothered to do the maths but that hurts. You'll also most likely have a ltd co set up, have accountants fees etc. of course you can write costs off against income, but damn-who would prefer a flat rate of 18-28% where you know where you stand with it, or having it tied up in ltd cos and all the record keeping?

Of course, it all boils down to one thing. Are you a speculator or an investor? I, for one, have no idea. Have read loads and am still no closer to an answer...
If you can't prove to HMRC that you're a hobbyist in your trading activities using the 'badges of trade' tests then you're liable to income tax and class 4 NI, not CGT. Pursuing a regular profit is one of these and you'd have a great deal of trouble convincing the commissioners you ever possessed an underlying security unless you actually trade shares and not a CFD derivative.

You could potentially wrap your trading activities up in a company to avoid National Insurance (you pay corporation tax on distributable profits and then only income tax on dividends), but this is only profitable insofar as your profits are below a certain level (so you pay corp tax at the lower level).

You can obviously deduct all relevant expenses either as a sole trader or a corporation and I would advise looking into 'use of home' on the web. It is my biggest deduction as I rent in London. Commissions etc go without saying.

The first year you file a tax return can be very difficult due to payments on account for the next year falling due (very roughly speaking, a sort of predictive PAYE for self employed people). The first return I filed as a trader cost me a fortune, but since you receive credit on your subsequent returns, it levels out.

I settled with HMRC separately to the return process on my spreadbetting activities - always push back on SB, it's very unclear and no final test case exists to my knowledge.
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Old Jan 5, 2013, 9:19am   #60
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Re: uk tax laws on forex

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Originally Posted by random12345 View Post
If you can't prove to HMRC that you're a hobbyist in your trading activities using the 'badges of trade' tests then you're liable to income tax and class 4 NI, not CGT. Pursuing a regular profit is one of these and you'd have a great deal of trouble convincing the commissioners you ever possessed an underlying security unless you actually trade shares and not a CFD derivative.

You could potentially wrap your trading activities up in a company to avoid National Insurance (you pay corporation tax on distributable profits and then only income tax on dividends), but this is only profitable insofar as your profits are below a certain level (so you pay corp tax at the lower level).

You can obviously deduct all relevant expenses either as a sole trader or a corporation and I would advise looking into 'use of home' on the web. It is my biggest deduction as I rent in London. Commissions etc go without saying.

The first year you file a tax return can be very difficult due to payments on account for the next year falling due (very roughly speaking, a sort of predictive PAYE for self employed people). The first return I filed as a trader cost me a fortune, but since you receive credit on your subsequent returns, it levels out.

I settled with HMRC separately to the return process on my spreadbetting activities - always push back on SB, it's very unclear and no final test case exists to my knowledge.
Random is absolutely correct in his assessment of the tax situation. If you are trading in the same sense as any other trade and fulfil the badges of trade then you will be liable to income tax and Class 4 NIC and you should register for Class 2 NIC if your profits in a tax year exceed £5k.

If you don't put any money aside for tax/NIC as soon as you start making money then the first tax return will hurt as you will have to pay all of the tax/NIC due on the first return plus 50% on account for the next year, so in effect 150% will be due.

The taxes due will be for the accounting period which ends in the tax year, with the money being due on 31st January following the end of the tax year. You have some scope to play around with the accounting period as you can choose when this is in your first year and it doesn't have to be either the first 12 months of trading or the tax year. You may also find you are paying extra tax on the 2nd return depending upon when your AP ends. The rules on it are too complex for me to explain but after 3 years it will always level out and any extra tax paid will be credited in your last year of trading.

The cashflow situation is somewhat better with a ltd co as you first corporation tax bill (20% of profits) is due 21 months after you start trading and is for the first 12 months only with no payments on account. Of course if you take dividends and haven't done sufficient planning to avoid higher rate tax, then the the additional tax due on the net dividends (another 25%) is due in the same way as trading profits, ie via self assessment with payments on account each year.

If the accountant Bootsy saw specialises in trading, then I doubt very much whether the advice he was given was the same as what he posted. Trading may be subject to either CGT or Income Tax depending upon a variety of factors (ie the badges of trade). You don't get a choice in the matter.

If the accountant has told you that you will only be liable to tax if it is your sole income then that is a very dangerous oversimplification of the situation, and if they have said cart blanche that the tax you will be liable for is CGT then I would suggest you go to another accountant, or preferably a tax adviser who would know a lot more about this than an accountant.
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Old Jan 5, 2013, 10:49am   #61
 
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Re: uk tax laws on forex

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Originally Posted by compound3 View Post
Random is absolutely correct in his assessment of the tax situation. If you are trading in the same sense as any other trade and fulfil the badges of trade then you will be liable to income tax and Class 4 NIC and you should register for Class 2 NIC if your profits in a tax year exceed £5k.


If you don't put any money aside for tax/NIC as soon as you start making money then the first tax return will hurt as you will have to pay all of the tax/NIC due on the first return plus 50% on account for the next year, so in effect 150% will be due.

The taxes due will be for the accounting period which ends in the tax year, with the money being due on 31st January following the end of the tax year. You have some scope to play around with the accounting period as you can choose when this is in your first year and it doesn't have to be either the first 12 months of trading or the tax year. You may also find you are paying extra tax on the 2nd return depending upon when your AP ends. The rules on it are too complex for me to explain but after 3 years it will always level out and any extra tax paid will be credited in your last year of trading.

The cashflow situation is somewhat better with a ltd co as you first corporation tax bill (20% of profits) is due 21 months after you start trading and is for the first 12 months only with no payments on account. Of course if you take dividends and haven't done sufficient planning to avoid higher rate tax, then the the additional tax due on the net dividends (another 25%) is due in the same way as trading profits, ie via self assessment with payments on account each year.

If the accountant Bootsy saw specialises in trading, then I doubt very much whether the advice he was given was the same as what he posted. Trading may be subject to either CGT or Income Tax depending upon a variety of factors (ie the badges of trade). You don't get a choice in the matter.

If the accountant has told you that you will only be liable to tax if it is your sole income then that is a very dangerous oversimplification of the situation, and if they have said cart blanche that the tax you will be liable for is CGT then I would suggest you go to another accountant, or preferably a tax adviser who would know a lot more about this than an accountant.
Absolute rubbish, this all depends on whether/how you are classifying the enterprise. Random has mentioned two ways, sole trader or a corporation. You cant then start spouting about class 4 or class 2 NI until you define this enterprise.
And its also pretty damn easy to convince HMRC whether its not your sole income. Show him your P60.
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Old Jan 5, 2013, 2:44pm   #62
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Re: uk tax laws on forex

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Originally Posted by malaguti View Post
Absolute rubbish, this all depends on whether/how you are classifying the enterprise. Random has mentioned two ways, sole trader or a corporation. You cant then start spouting about class 4 or class 2 NI until you define this enterprise.
And its also pretty damn easy to convince HMRC whether its not your sole income. Show him your P60.
I'm not quite sure what you think is rubbish.

As I explained Class 2 & 4 NIC and income tax are paid by sole traders and Corporation Tax is paid by limited companies. You don't pay any NIC on dividends but you may have a liability to further income tax if you are a higher rate tax payer.

As for the reference to the P60 I am at a complete loss as to it's relevance. A P60 only shows PAYE earnings for the year, and does not show any other income source.

Having earnings which are taxed via PAYE does not preclude your activities from being classed as trade. I have several clients who have both PAYE and self employed earnings.
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Old Jan 5, 2013, 3:23pm   #63
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Joined Mar 2012
Re: uk tax laws on forex

Thanks to all the contributors of the thread,
i have nt quite had chance to read all yet - so maybe this has already been discussed - but is there any way trading income can be taxed as in the "Jimmy Carr" and "Take That" (sorry, giving nothing) tax bands and schemes

What Jimmy Carr Can Teach You About Tax Avoidance | money.co.uk
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