Income Tax on Gambling Winnings

[mohbud]

Hi All,

This is my first post on here so apologies if I'm going over ground that has already been covered!

Basically, I earn regular money from gambling each month/year on a betting website called Betfair while still working in a full-time job. Now, my understanding is that UK tax laws are such that I don't pay any tax on my winnings because losing gamblers could offset there losses (this could be completely wrong). Anyway, I'm happy with the situation as it is at the moment but I'd like some clarification and guidance on what to do next.

I have developed a winning strategy that friends and family want to invest in. They would give me the original capital, I would hold it for a year - investing and re-investing the sum many times over the period - and then give them the balance back at the end of the year. For my services I would charge a fee (20% on profits on a weekly basis). So my question is how does this work for tax purposes?

Do I pay income tax on the charges?
Do they pay capital gains tax on the (hopeful) increase in their balances over the year?
Do I have to set-up a company?

Any help that anyone could offer would be greatly appreciated.

Kind Regards,
mohbud

[Peter D]

It sounds like you may be gambling but you family are investeing, yes even at risk, but it is not gambling. You would be running a business and Tax and may be NI will be due. Regards Peter

[Generix]

Hi All,

This is my first post on here so apologies if I'm going over ground that has already been covered!

Basically, I earn regular money from gambling each month/year on a betting website called Betfair while still working in a full-time job. Now, my understanding is that UK tax laws are such that I don't pay any tax on my winnings because losing gamblers could offset there losses (this could be completely wrong). Anyway, I'm happy with the situation as it is at the moment but I'd like some clarification and guidance on what to do next.

I have developed a winning strategy that friends and family want to invest in. They would give me the original capital, I would hold it for a year - investing and re-investing the sum many times over the period - and then give them the balance back at the end of the year. For my services I would charge a fee (20% on profits on a weekly basis). So my question is how does this work for tax purposes?

Do I pay income tax on the charges?
Do they pay capital gains tax on the (hopeful) increase in their balances over the year?
Do I have to set-up a company?

Any help that anyone could offer would be greatly appreciated.

Kind Regards,
mohbud

Replace betfair/betting website with FTSE and you call yourself a banker ;p
I'm not sure but you may be required to register for some sort of betting/gaming duty by acting as execution agent (not sure if this duty is meant to be cumulative as pretty sure Betfair would be responsible for it in current chain?). Haven't looked at this area since the new rules kicked in.

[robbob]

Hello mohbud

Generally speaking gabmling isnt a business and if people are backing you then i would say they are also gambling as they may win or they may lose depending on your results.

However as Generix mentions your activities may amount to a trade.

If you place best via betfair by taking offered odds available then i would say this is normal gamling activity.
However if you actively leave unmatched bets to be taken by others this shows some of the same characteristics of a book-maker.
http://www.hmrc.gov.uk/manuals/bimmanual/BIM22018.htm
Obviously there is probably a grey area in that leaving the odd bet to be matched probably doesn't amount to a tradeas the guidance states

The key feature is that the taxpayer is likely to be involved in the organisation of the activity

Also if you receive appearance money for taking part in events from sponsors or the like this will probably amount to a trade
http://www.hmrc.gov.uk/manuals/bimmanual/BIM22017.htm

Basically you should read the full details here before making a decision
http://www.hmrc.gov.uk/manuals/bimmanual/BIM22015.htm

Note even if your gamblings do not amount to a business i would recommend keeping a detailed diary of events / income / outgoings so that you can prove this is where your incoem has come from.
I would guess it is a common cover for people with illegal cash income to use gambling as a cover for these activities.
Proof of the source of your income may be useful if the revenue or others start to ask questions about where your sources of income have come from.

[Incredulum]

This is a very interesting question.

I'd say it's absolutely clear that in betting with Betfair in the way you have been that you're not subject to income tax. (Note here for Robbob: my understanding of Betfair is that you are actually actively leaving unmatched bets to be taken by others. http://en.wikipedia.org/wiki/Betfair wiki link as firewall won't let me look at Betfair... However, I still think it's gambling, not a trade - though clearly the waters are muddier here than they are if you bet at WillHill.com where you are betting against the "bank".)

Now, in addition to this, you are taking money from friends & family and placing bets for them. And taking a cut of their profits. Does this make any difference to the taxable status of your own winnings on your own cash "invested"? If of course you're betting against your family, you have become a bookmaker and gains are taxable. However, if you're making money for both them and you at the same time then you're clearly not doing this. So we look at the case law which shows that to be taxable betting wins must come from the operation of the trade, not merely an opportunity the trade provides. In Burdge v Pyne, the owner of a gaming club habitually played cards with his customers and always won, and it was held he had to pay tax on his winnings. However in Down v Compton a professional golfer playing golf for bets was not taxable as his business was not that of betting on games of golf. Confused yet? I think that if you are making real bets with your own cash in the way you have been then they are gambling winnings.

What is your position with your family? Have they made you a loan which you gamble tax free, and then return an element of profit to them, this could be "interest" for them computed as a function of your profits - you might have to withhold basic rate income tax(?). It could just be "other" income for them. But what happens if you make a loss, who pays then?

So alternatively, do you gamble on their behalf, and take a cut of the winnings. In which case, are they trading? No. But you are in respect of the profits you take from them. I think a sensible analysis of this has to come down to the nature of the relationship between you and your friends. Is it a loan on which a return is made? Who suffers the loss if you make a loss? You want to have this sorted in a legal document before you go ahead with this scheme, otherwise you will end up being chased for money you no longer have.

In conclusion, as I've been thinking aloud here, if your friends bear the risk of their losses then in my view they are gambling, if you bear the risk of the losses then you are just gambling with borrowed money on which you pay some sort of income return.

Pete suggests that the family are “investing”. In which case, how and why are you proposing taxing their winnings? And why are they not gambling. If I give Pete a tenner to put on a horse for me – his choice – then I am definitely still gambling, not investing. The same is true here, OP is presumably either agent or trustee for his family.

Finally, you ask whether you should set up a company. Well, you could get your friends to invest the money by buying shares. In which case, clearly any return to them is either capital or dividend income. Or they could lend money to the company, in which case the return would be “income” of some form or another. The company would presumably be trading as it’s not really possible for a company to “gamble”.

Or the company could gamble their money for them – as an agent/trustee - in which case it would be gambling on their behalf. As for the company, it would be taxable only on its fee.

And finally (again), I won’t be “investing”, sorry.

[Incredulum]

A further thought on Betfair, with regard to unmatched bets. If nobody ever placed unmatched bets, then there would be no Betfair. I don't actually know how betfair really works; are there lots of people leaving bets up there at silly odds? I presume it is a reasonably perfect market as the barriers to entry are very low indeed - i.e. if somebody offers silly odds then somebody else will offer better odds which suggests to me that few if any on there are trading. It's not like William Hill taking money from punters by offering 1000:1 on Elvis being found on the moon.

[robbob]

Hello Incredulum

I think you are getting there in working out of betfair works.
You original post is only half correct when you say

my understanding of Betfair is that you are actually actively leaving unmatched bets to be taken by others

This is correct in that an individual leaves an unmatched bet at the odds they like, this bet does not materialise unless there is another betfair willing to take the bet offered at the price offered.
If there is no taker the bet never takes place - ie it is cancelled.

The person leaving the unmatched bet to be matched at specific odds is a bit like the bookie.
The person taking the bet made available is like your average punter taking a bet.

However the person offering the odds is sometimes just your average punter who simply thinks the current odds on offer aren't good enough and would be happy to have a bet if he got a little bit better odds- this is probably the case if you leave sporadic unmatched bets with no formal system in place where you sometimes get the odd bet and sometimes don't

Some individuals however will offer unmatched bets on all/most of the different outcomes for a particular
event and they will be highly likely to make a profit provides that particular event continues to have odds at less than 100% payout for the "punters taking the bet" - this type of activity is similar to that of a bookie that it may amount to a trade under some circumstances.

Obviously there are lots of grey areas in between so none of the above should be taken to mean that one particular type of betting pattern will actually amount to a trade as far as the taxman is concerned.

It is a fact that there are plenty (but low in % terms) of non mug punters out there and the bookies very quickly reduce the size of the bets available to these individuals and betfair make extra charges to some individuals that use their betfair account to make consistent profits from very frequent trading.

[mohbud]

Thanks for all of your valuable advice guys, can't believe how fantastic this forum is!

For clarity, the agreement with friends and family is simple. They give me the cash, I hold it for 10 months then give them the balance (minus costs incurred throughout the term) and then I give them back their balance at the end of the term whether the balance is higher/lower than the original amount. So in answer to Incredulum's question, if I make a loss the investors pay. Would you recommend having a contract drawn up?

Robbob mentions keeping detailed records of every trade/bet. This is fine to do and is a must for anyone taking gambling seriously. Also, the investors would not be so willing with their interest without the vast sums of data I have to back-up my 'edge'.

My idea is to receive the money. Put all of the money in my Betfair account. Gamble on that account. Withdraw my costs each week. Withdraw the full balance at the end of the term. Pay the investors their balance. Does that make sense?

Just a quickie on Betfair:

The fixed-odds Bookmakers (William Hill et al) originally complained and campaigned about and against Betfair with their argument being that layers were acting as bookmakers and thus should be taxed. Their argument fell flat on it's face when some bright spark at Betfair told them that laying a horse on Betfair was exactly the same as backing every horse bar one in any race. There a countless websites now that will do the 'dutching' calculators for you in an instant. Similarly, a backer of one horse could be described as laying the field.

Thanks again for the helpful advice

[robbob]

The fixed-odds Bookmakers (William Hill et al) originally complained and campaigned about and against Betfair with their argument being that layers were acting as bookmakers and thus should be taxed. Their argument fell flat on it's face when some bright spark at Betfair told them that laying a horse on Betfair was exactly the same as backing every horse bar one in any race. There a countless websites now that will do the 'dutching' calculators for you in an instant. Similarly, a backer of one horse could be described as laying the field.

The problem here would have been that the bookies where trying to prove a general point of principle that covered so many differents sets of circumstances they always had an uphill task trying to get a full ban.

The rules for trading will be specific for your circumstances and i would say that the revenue would have a high chance of winning a trading argument if you offer multiple bets on the same market in large volumes to members of the public.
http://www.hmrc.gov.uk/manuals/bimmanual/BIM22018.htm

[Incredulum]

Thanks. Very interesting.

It sounds as though many of the people leaving bets on betfair are operating very much like bookmakers. However, a bookmaker has to be licensed and they're not licensed, only Betfair is. Which certainly makes the waters muddy.

So, with regard to my previous post: I wonder whether OP is in fact trading, it does begin to sound as though he is, if he is offering multiple bets to the public he certainly has many of the attributes of trading much as a bookmaker would. And I wonder whether the family will be trading too. They are clearly offering him capital.

OP. How much are your family putting in, and what are the anticipated profits? This will make a difference with regard to a sensible structure.