Spread betting is essentially gambling, and it is generally accepted following a line of tax cases that gambling winnings are not subject to income tax, although the statutory authority for this is somewhat weak. Section 1(1) Income and Corporation Taxes Act 1988 provides:
Income Tax shall be charged in accordance with the provisions of the Income Tax Acts in respect of all…profits or gains…
The main tax cases on this subject concerned firstly an individual who made his living from betting on horse races from his home, and his profits in this respect were held to be not taxable. On the other hand, two people who attended horse races on a regular basis and both made and laid bets were held to be taxable on their profits, and this somewhat contradicts the first mentioned case!
The true reason for such winnings not being subject to income tax is that clients of bookmakers, considered as a class, will generate more losses than profits, and any attempt by the Revenue to subject to tax the profits of an individual who does make a profit would lead to them having to allow the losses of others, thus leading to a net diminution in tax revenues.
Also, some activities are so inherently uncommercial, so as to be so different from a trading type of activity, that the profits therefrom are not subject to income tax.
It is, however, difficult to see how these principles relate to spread betting profits, as I do not see how taking uncovered positions with spread betting firms should be any more uncommercial than taking uncovered positions in one form or another of financial derivatives.
Also, the clients of spread betting firms (considered as a class) in a market following a consistent trend, may enjoy a positive expectation of profit.
The profits from spread betting are however not taxable, and the reason for the difference in treatment has been stated to be that financial derivatives are real in that they may lead to the underlying contract being implemented.
This distinction is not very persuasive however if we look at, for example, a call option on the performance of the FTSE100 which is not capable of leading to the passing of title in the constituent shares of that index.
However, the principle that profits from spread betting are tax free is sufficiently entrenched in the tax system that it can be assumed, for the time being, to be correct.
The fact that a significant volume of such transaction is undertaken should not alter this fact. It has been held in the Court of Appeal that “it is not a right test in law to try and apply the touchstone of habit or system as to whether or not a trade was carried on.” I have it on good authority that the Inland Revenue are unlikely to contend that the profits of systematic spread betting are taxable and, even if they do, they are unlikely to succeed.
As the basis for the non-taxability of spread betting winnings is somewhat nebulous, it must be recognised that there is a clear possibility that, if an individual were to carry on a trade of dealing in financial derivatives which was closely bound up with bets placed with spread betting firms, a court might hold that the profits from spread betting were taxable.
This point can be illustrated by a tax case in which a club owner played three-card brag with some members in a back room; Burdge v Pyne, Chancery Division 1968. The club owner was found to be taxable on his card winnings as these were held to be ancillary to his main business activity.
In the case of an individual who entered into financial derivative contracts which effectively hedged spread bet contracts, it would be difficult to resist the conclusion that the two activities were as a matter of fact not interlocked thereby bringing the spreadbetting profits within the charge to income tax.
Mark Faherty - Trio Accountancy Services Ltd
Income Tax shall be charged in accordance with the provisions of the Income Tax Acts in respect of all…profits or gains…
The main tax cases on this subject concerned firstly an individual who made his living from betting on horse races from his home, and his profits in this respect were held to be not taxable. On the other hand, two people who attended horse races on a regular basis and both made and laid bets were held to be taxable on their profits, and this somewhat contradicts the first mentioned case!
The true reason for such winnings not being subject to income tax is that clients of bookmakers, considered as a class, will generate more losses than profits, and any attempt by the Revenue to subject to tax the profits of an individual who does make a profit would lead to them having to allow the losses of others, thus leading to a net diminution in tax revenues.
Also, some activities are so inherently uncommercial, so as to be so different from a trading type of activity, that the profits therefrom are not subject to income tax.
It is, however, difficult to see how these principles relate to spread betting profits, as I do not see how taking uncovered positions with spread betting firms should be any more uncommercial than taking uncovered positions in one form or another of financial derivatives.
Also, the clients of spread betting firms (considered as a class) in a market following a consistent trend, may enjoy a positive expectation of profit.
The profits from spread betting are however not taxable, and the reason for the difference in treatment has been stated to be that financial derivatives are real in that they may lead to the underlying contract being implemented.
This distinction is not very persuasive however if we look at, for example, a call option on the performance of the FTSE100 which is not capable of leading to the passing of title in the constituent shares of that index.
However, the principle that profits from spread betting are tax free is sufficiently entrenched in the tax system that it can be assumed, for the time being, to be correct.
The fact that a significant volume of such transaction is undertaken should not alter this fact. It has been held in the Court of Appeal that “it is not a right test in law to try and apply the touchstone of habit or system as to whether or not a trade was carried on.” I have it on good authority that the Inland Revenue are unlikely to contend that the profits of systematic spread betting are taxable and, even if they do, they are unlikely to succeed.
As the basis for the non-taxability of spread betting winnings is somewhat nebulous, it must be recognised that there is a clear possibility that, if an individual were to carry on a trade of dealing in financial derivatives which was closely bound up with bets placed with spread betting firms, a court might hold that the profits from spread betting were taxable.
This point can be illustrated by a tax case in which a club owner played three-card brag with some members in a back room; Burdge v Pyne, Chancery Division 1968. The club owner was found to be taxable on his card winnings as these were held to be ancillary to his main business activity.
In the case of an individual who entered into financial derivative contracts which effectively hedged spread bet contracts, it would be difficult to resist the conclusion that the two activities were as a matter of fact not interlocked thereby bringing the spreadbetting profits within the charge to income tax.
Mark Faherty - Trio Accountancy Services Ltd
