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Julie Butler FCA of Butler & Co highlights Tax Considerations for those involved with the Online Gambling Industry.

Introduction

The betting “exchanges”, i.e., online gambling involves mind-boggling turnover and, clearly, a large proportion of the UK population. It is fair to say that the sophistication of online gambling and now the gamblers and online service providers develops as quickly as the design techniques of the “iPhone”. The gambling is not restricted to horse racing – every sport is encompassed.

“Laying” and Betting Exchanges – Lack of Understanding

Despite the growth of the industry there are many who do not understand how “exchanges” work or indeed what it is to “lay” horses, sportsmen or teams on the exchanges - i.e., gambling on their losing. Isn’t that essentially what bookmakers (bookies) do?  By taking the bet to win from the punter they are betting for a losing result with a controlled analysis of the outcome by determining and changing the odds to ensure that overall, they will win.

The difference between the exchanges and the bookmaker can be the impact on the odds by emotion and lack of information. To be successful, the “bookie” must be devoid of feelings and fully informed. It is rare therefore for the “bookies” to offer odds that are not a fair statistical reflection of the potential outcome. The odds offered by the exchanges are distorted by emotion and this can be exploited by the pro-punter in a systematic way – does that become a taxable activity?

Taxation of Bookmakers

The bookmaker is taxable on profit from the trade of gambling.

Betting by professional bookmakers is assessable even if carried on in an unlawful way. (Southern v AB (1933) 18 TC 59). Private betting is not assessable, however habitual. Its profits, if any, are also exempt from Capital Gains Tax (TCGA 1992 s 51(1)). Receipts from newspaper articles based on a betting system were, however, held to be assessable to Income Tax in Graham v Arnott (1941) 24 TC 157.

Taxation of the Gambler

The current understanding of case law is set out in an old case, Graham v Green (1925) 9 TC 309, a case which concerned a man whose sole means of livelihood came from betting on horses at starting prices. Mr Justice Rowlatt said at page 313:

“Now we come to betting, pure and simple… It has been settled that a bookmaker carries on a taxable vocation. What is the bookmaker’s system? He knows that there are a great many people who are willing to back horses and that they will back horses with anyone who holds himself out to give reasonable odds as a bookmaker. By calculating the odds in the case of various horses over a long period of time and quoting them so that on the whole the aggregate odds are in his favour, he makes a profit. That seems to be  organising an effort in the same way that a person organises an effort if he sets out to buy himself things with a view to secure a profit by the difference in what I may call their capital value in individual cases.”

But as that case was decided before my father was born, do we question the application to exchanges?

Taxation of the Exchange "Pro-Punter"

Mr Justice Rowlatt continues:

“Now we come to the other side, the man who bets with the bookmaker, and that is this case. These are mere bets. Each time he puts on his money, at whatever may be the starting price. I do not think he could be said to organise his effort in the same way as the bookmaker organises his. I do not think the subject matter from his point of view is susceptible of it. In effect all he is doing is just what a man does who is a skilful player at cards, who plays every day. He plays today and he plays tomorrow and he plays the next day and he is skilful on each of the three days, more skilful on the whole than the people with whom he plays, and he wins. But I do not think that you can find, in his case, any conception arising in which his individual operations can be said to be merged in the way that particular operations are merged in the conception of a trade. I think all you can say of that man…is that he is addicted to betting. There is no tax on a habit. I do not think “habitual” or even “systematic” fully describes what is essential in the phrase “trade, adventure, profession or vocation.”

Does this apply to betting on exchanges? Does it apply to systematic use of exchanges? Does the adviser need greater clarification?

Taxation of the “Systematic Professional Punter"

The user of the online betting exchanges is betting on the outcomes of events. The odds available on the betting exchanges are not stastically “true” in the way the odds of a bookmaker are. Exchanges involve factors which present bias, emotion, passion, team loyalty and ill-researched fun betting, and this can create the opportunity for “professional punters” with, at the very least well-researched facts and the understanding of “wrong odds”, and at best, sophisticated computer programmes to combat bias. Are these gamblers professional punters or bookmakers? Are they “tax free” or taxable? Have the government really come to terms with the power and the volume?

As the government has not introduced any licensing of volume or further definition, case law would indicate that they are still just “tax free pro-punters”. Is this an unfair tax advantage to the systematic pro-punters?

Despite the 2005 Gambling Act and close scrutiny by the Department of Culture, Media and Sport (DCMS) there has been no further classification or grading of the professional punter.

The Tax Position of Gamblers who Lose

We cannot forget that such “pro-punters” are relatively small in number and the tax loss claims for allowable losses could be problematic for both HMRC and tax advisers. A good example of the extent of the potential losses is the Court of Appeal case of Calvert v William Hill Credit Ltd., published in December 2008. The decision was that a bookmaker, which had agreed not to take telephone bets from a 'pathological gambler', was not liable for his losses following the bookmaker’s failure to implement the agreement. The bookmaker had not assumed a responsibility to enable the gambler to gamble free of risk, nor did the scope of the duty of care undertaken by the bookmaker.  The Court of Appeal so held, dismissing an appeal by the claimant, Graham Calvert, of his claim for £2,052,972.18 largely composed of his losses on telephone betting with the defendants, William Hill Credit Ltd., between August and December 2006. In the judgement of the Court, the said claimant, a greyhound trainer from Sunderland, was a compulsive gambler whose condition was becoming pathological when he opened a telephone account with the defendant in May 2006. At the time, the defendant, together with other bookmakers, had a voluntary code of practice for dealing with problem gamblers. One approach offered a self-exclusion agreement: the gambler could request closure of his account and the bookmaker would agree not to accept bets for six months. The defendants did not assume a responsibility to enable the claimant to gamble free from all risk. What of a tax loss position in this case?

Gambling by Proxy - The Pro-Punter goes a stage too far

Gambling by proxy is where a pro-gambler uses someone else’s money and takes a cut of the winnings. This is a service. The person who puts up the money is gambling and this is tax free; the pro-gambler is providing a gambling service and is trading.

Services provided to Gamblers.

Since online pro-gambling involves very sophisticated computer programs, IT experts are often drafted in to help create the software. Some of these IT contractors are paid via a “cut” of the winnings. They are not gambling, they are providing an IT service and are either taxable as a sole trader or, alternatively, an employee of the gambler similar to somebody who pays “a nanny to look after their children.”

Betting Exchanges “Tax” The Profitable

Since Autumn 2008 “Betfair” have introduced a system to identify the profitable pro-punters with high volume, and charge them more commission. Perhaps this is setting the scene for future identification? Have Betfair identified those that should be taxable?

This is a complex problem for the betting exchanges, the government, the pro-punter and the tax adviser alike. Gambling is currently “tax free” for the pro-punter but is greater clarity needed around the tax position of those who use the betting exchanges with statistical competence?  As more and more of the on-line gambling providers seek tax sanctuary offshore in Gibraltar can the systematic pro-punter remain tax free?

Summary

The gambler can currently earn or lose money outside the scope of tax, in simplistic terms “tax free”. There are areas of pro-punter activity connected to online gambling that could move the gamble into the domain of the taxable vocation – every case must be assessed on its merits and clearance should be obtained from HMRC where there are concerns.