The tax free nature of gambling proceeds

A recent First-tier Tribunal (FTT) case regarding the proceeds of gambling is a timely reminder of how such income and losses should be treated for tax purposes amid growing concerns about an increase in online gambling during the coronavirus lockdown. The Gambling Related Harm All Party Parliamentary Group suggested that the enforced lockdown could result in an increase in gambling levels and an online gaming entertainment. A solutions provider said in a recent update to the stock market that customer activity in the its casino and poker products had increased.

Tax legislation, supported by tax cases such as the recent FTT case, are clear that gambling winnings are not currently taxed in the UK. Instead, casinos and other betting sites pay taxes on their profits and remote gaming operators pay a 15 per cent duty. The basic principle is simple: overall punters will lose more than they win while, as the saying goes 'the house always wins'. HMRC does not wish to give tax relief for personal gambling losses, but it most certainly does wish to tax the industry’s profits!

The recent FTT case concerned an appeal by a successful gambler who amassed winnings of £300k over a six-year period. The FTT quashed HMRC assessments and penalties approaching £450k in total after finding that the taxpayer’s income was derived purely from his gambling activities and so was not taxable trading income. The FTT noted that it was not in issue that winnings from gambling do not amount to a trade and are not taxable, and even referenced the HMRC guidance on this point.

HMRC argued that, as the taxpayer’s bank statements revealed frequent and regular deposits into his bank accounts this suggested that he was trading, especially because the taxpayer produced no evidence to support his claim that he was a successful gambler. The core theme underlying HMRC’s contention was that it was improbable that the taxpayer would have consistently beaten the bookmakers.

HMRC tried to point to the lack of betting records to undermine the taxpayer’s position that the money arose from gambling. A lack of records did not derail this particular appeal (although other cases have held this to weaken a taxpayer’s position) but anyone engaged in substantial betting activity would be wise to keep sufficient records to protect their position should HMRC ever enquire about the source of funds.

Recent evidence suggests that, amid lockdown restrictions, gamblers are switching from wagers on sport to far riskier online casino and slot games. This tax case reminds successful punters to keep records to evidence any income from this activity. And, as campaigners remind everyone who gambles, 'when the fun stops, stop.'