Mark McLaughlin looks at one activity where HMRC normally argues that no trade is being carried on.
It is relatively common for HM Revenue and Customs (HMRC) to argue that an individual’s activities amount to a trade, so any profits from that activity can be taxed.
Is it a trade?
Regular and structured transactions on e-Bay or Amazon are examples where HMRC has been looking out for undisclosed trades being carried on. In many cases, the scale of activities will be such that the trading allowance of £1,000 per tax year is insufficient to exempt the gross income from those activities, so it will be necessary to register for self-assessment and pay tax on profits.
However, for certain trades HMRC seek to argue that no trade is carried on. One such activity is gambling. This is perhaps understandable; most gamblers are unsuccessful in the long run. If HMRC treated gambling as a trade, most gamblers would be able to set losses against their general income (or capital gains). It would cost the government a fortune!
HMRC’s view
Having said that, some gamblers are successful. Unlike for unsuccessful gamblers, HMRC may seek to treat a successful gambler as trading and tax their profits accordingly.
The ‘basic position’ for HMRC is that betting and gambling do not constitute a trade. However, HMRC’s Business Income manual states (at BIM22015): ‘…an organised activity to make profits out of the gambling public will normally amount to trading.’
In the case of ‘professional’ gamblers, HMRC’s guidance states: ‘The fact that a taxpayer has a system by which they place their bets, or that they are sufficiently successful to earn a living by gambling does not make their activities a trade’ (BIM22017). There is long-established case law supporting this approach (Graham v Green, KB 1925, 9 TC 309).
However, in McMillan v Revenue and Customs [2020] UKFTT 82 (TC), HMRC sought to tax the profits of a professional gambler.
Is that so?
In McMillan, the appellant (who had not been employed or self-employed in any capacity since 1998) took up serious gambling in or about 1999. His gambling involved betting on football results, and private poker games. All his dealings were in cash. In 2010, the appellant decided that his increasingly unhealthy lifestyle could not continue, and he spent the next two years rearranging his life. He gradually drew his accumulated funds from his safe and distributed the money into the various bank accounts he had opened. He then purchased and restored a house.
HMRC issued discovery assessments for the tax years 2006/07 to 2013/14 inclusive, and penalties for failure to notify. HMRC contended that the appellant had engaged in a trade of gambling. However, the First-tier Tribunal found that there was (at most) only circumstantial evidence in the form of the appellant’s bank deposits. Furthermore, in the tribunal’s view there would almost certainly have been some degree of mixed pleasure or satisfaction derived by the appellant from his gambling above and beyond the monetary reward. The appellant’s appeal was allowed.
Practical tip
In McMillan, no records were kept by the appellant of his gambling winnings. However, individuals seeking to contend that their gambling profits are non-taxable would be well advised to keep adequate records (see Brimelow v Price [1965] 49 TC 41).
