With online gambling’s popularity on the increase, what is the tax impact for those who take it up professionally?
The UK Tax Position of the Professional Gambler
Essentially betting is “tax free” – the professional gambler is outside the scope of tax. This is confirmed in HMRCs Business Income Manual (BIM) at para 22015. The basic position is that betting and gambling, as such, do not constitute trading. Rowlatt J said in Graham v Green (1925) 9 TC 309:
“A bet is merely an irrational agreement that one person should pay another person on the happening of an event.”
This decision has stood the test of time. In an Australian case, Evans v FCT (1989) 20 ATC 4540, Hill J said:
“There has been no decision of a court in Australia nor, so far as I am aware, in the United Kingdom where it has been held that a mere punter was carrying on a business.”
Is spread betting tax free?
So is a sophisticated on-line gambler a “mere punter”? An organised activity to make profits out of the gambling public will normally amount to trading. Although over time new forms of games of chance have evolved, these principles remain the same. The taxpayer placing a spread bet is not normally carrying on a trade (see BIM22020 for exceptions). The professional gambler is not taxable on the profits, nor does he or she receive tax relief for losses. But, the bookmaker organising the spread bet is taxable on his or her profits.
What guidance does HMRC give on gambling and tax?
The section on betting and gambling in HMRC’s Business Income Manual contains the following further guidance:
- What is a bet – BIM22016
- The professional gambler – BIM22017
- Organised activity – BIM22018
- Element of existing trade – BIM22019
- Spread betting – BIM22020
Is Professional Gambling Considered Trading for Tax Purposes?
Is an on-line professional gambler still just operating a system by habit or are they trading? Provided that the “pro-punter” is not carrying on an organised activity to make profits out of the gambling public, it is considered this will not amount to trading.
The betting exchanges have produced a number of sophisticated pro-punters who approach their work on a scientific, well-researched basis. This is not “irrational” but the profit is “tax free”. For tax purposes there is no distinction between recreational and non-recreational players. How does the pro-punter deal with the issues of tax compliance?
The safe answer has to be to make HMRC aware of the position. This can be done by simply writing to the pro-punter’s local tax office stating that he or she has income from gambling and to record the details each year on a tax return. It is also important to obtain clearance from HMRC via “Code of Practice 10”.
Why is Gambling “Tax-free”?
It is assumed that the simple answer is that HMRC could not cope with the tax claim for gambling losses! The sporting world involves a large amount of gambling at all levels. In practice, if HMRC tried to assess the “winners” to tax there would be a deluge of tax loss claims.
Practical tax tip- Gambling
Keep a record of winnings in case evidence is required at a later stage. HMRC always need to verify sources of income and windfalls in an enquiry situation, so it is important to keep records to avoid any future problems over (say) the identification of any capital introduced in to a business.
This article was first published in September 2010.