Is spread betting tax free if its your sole source of income?

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? I won’t be using the leveraged side of spread betting, it’s just the tax free part that sounds good to me. I like the idea of not having to pay tax, but it just seems too easy.

I think that it is pretty clear that someone who pays tax on another income source will never have a problem if they make money via spread betting. The crux of the matter really relates to an individual who makes their sole income through spread betting.

Taxes and Spread Betting

From HMRC website:

‘To be taxable, the spread betting wins must come not merely from an opportunity presented by a trade, they must arise from the carrying on of that trade. 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.’

The way I understand it is that there is no tax on spread betting winnings. That means no tax on gains, but also means you cannot offset your spreadbetting losses, unlike ‘normal’ share/bond trading or CFDs.

Of course, the Inland Revenue (HMRC) has the power to look at tax payers’ circumstances at an individual level if they are of the opinion that someone’s circumstances are unique or rare. In this respect I have little doubt that HMRC could deem a very successful spreadbetter as being ‘rare’ if it thought that it would help their case.

Having said that, I’m confident that the case of any possible Inland Revenue investigation against the ‘professional gambler’ would rest largely on the ethical principle; that persons conducting themselves in such a way by which they gain an income which they make a living on and should thereby be obliged to pay income tax on that money. This in practice means that some tax inspectors might provide advice which is 100% mechanical in nature where another may well introduce an element of ‘ethical principle’ (i.e. is it fair that someone might earn (win) £100k and not pay a penny in tax)?

Let’s assume that you earned £50, at the weekend, stacking shelves in Tesco but, traded 12 hours a day during the normal working week. Your profits, from trading, amounted to approximately £5,000 per week and you made 10 trades each day; what would HMRC consider to be your primary occupation and income source?

The shelf stacking in Tesco’s? Unlikely, I think…

“Try giving HMRC a call and see whether you ever get a clear-cut reply. I mean, you’re hardly likely to get a nice honest person at the IR saying all perky down the phone ‘yes sir that’s correct, go and make as much money as you can and you wont owe us a penny! Good luck sir!!!'”

Although I can understand both facets of the argument I’m not sure that the ethical standard could be used in a case which went as far as court. So long as the person in question could show that he / she was following the law then they wouldn’t have a case to answer. As far as I know there is nothing in law which states that someone must ‘pay’ income tax – instead the law requires that someone is ‘assessed’ for income tax – an assessment doesn’t mean that liability is always found.

You see there’s an absolute exemption from CGT and Stamp duty, but it is a potentially grey area where income is concerned. If spread betting profits constitute subsistence income, then it could be an issue. No clear cut answer. HMRC contains the same number of unambitious clock watchers as any other government department (that is when they are not on the sick) and most tax offices will be unable to give a sensible answer. You would probably need to be subject to an investigation before your status could be sensibly considered.

Having seen part of the rules regarding spread betting posted in a discussion board and they are cryptic, very cryptic. They are open to interpretation, deliberately so in my opinion. In my own experience government departments (DVLA, Inland Revenue etc) tend to overstate their powers and also make up their own ‘rules’ as they go along. It is up to the tax inspector to interpret these regulations and make a ruling on your tax position.I’m sure that many people wilt under pressure and just play ball but sometimes it is good to challenge them. The problem is that the only way to do that is to refuse to pay any tax! You can see the problem – it would be good if there were a couple of high profile cases which went to court.

Anyway, it seems the consensus seems to be that spread betting gains are tax free and in most cases you won’t ever be confronted by the Inland Revenue about not declaring it and frankly if you are confronted you probably stand a good chance of winning due to a little thing called ‘law’. Secondly, if the Inland Revenue were to starting considering gamblers for taxation via Income Tax then they’d have no option but to offer relief on losses. Since there is nothing to stop people having more than one business or trade anyone who gambled would thus be able to deduct losses (from gambling) from their taxable income. This would cost the Inland Revenue a fortune.

Having said that apparently no one has ever been convicted of not paying tax from spread betting earnings. Big companies such as IG Index pay huge amounts of corporation tax which may help to explain why this is the case. In Las Vegas (complete aside I know) they pay just 8% tax total as all the big casinos pay Federal and State taxes hence it’s the fastest growing state in the USA! Apart from anything else, as the majority of spreadbetters lose, HMRC will find raking in tax from the providers much more worthwhile (and easier) than chasing around after the few people who actually manage to make a sizeable profit.

In any case my advice is to stay under the radar and don’t say anything unless the Inland Revenue presses you. Which means it is a good practice to keep all paperwork in case you’re ever challenged by them. And maybe speak to a recommended tax adviser in the meantime to put the full stop on it.

Is it a requirement to mention spread betting on the tax returns even if it tax free?

There is no requirement to show spread betting ‘earnings’ on a return. Such a return would be incorrect. I have never come across a return which clearly shown spread betting earnings, but if one was received it would probably be processed normally since the term would probably mean little to those who do the processing, hence it is unlikely that it would be picked up for formal inquiry on this reason alone. The fact that a return has been processed does not imply any agreement on HMRC’s part.

You can present the full facts to HMRC in a letter and receive a written ruling by which they would be bound, if you have particular concerns. Or you could pay your ‘accountant/tax consultant who specialises in these things’ to do this on your behalf.

In any case if you are serious about this, seek advice from a competent and qualified professional.

“Remember that TAX will be the single biggest cost in your life. Earn a tax-free income trading the financial markets. Start Spread Betting Today!”