From Her Majesty’s Revenue and Customs(see the bold bits for the relevant stuff):
CG56105 - Futures: financial futures: financial spread betting
Instead of buying and selling financial futures or options an individual may simply gamble on the future direction of prices or indices. There are a number of spread-betting companies in the UK with which such bets may be placed.
For example, you might choose to bet on movement in the FTSE 100. If the index stands currently at 5400, the company might offer a ‘buy’ price of 5401 and a ‘sell’ price of 5399; the difference is the company’s ‘spread’. Buying with a stake of £5 per point you win £5 for every point the then selling price exceeds 5401 when you close your bet, but lose £5 per point if the index instead has fallen. Similarly, if you bet on the market falling, you win if on closing your bet the then buying price is below 5399, but lose if the market has risen.
The spread-betting company normally requires only a small deposit. Winnings or losses may well exceed this sum.
[B]Though the terminology used in spread betting frequently echoes that of the derivatives market, no assets are acquired or disposed of and no chargeable gains or allowable losses arise from spread betting[/B], see CG12602.
BIM22017 - Meaning of trade: exceptions and alternatives: betting and gambling - the professional gambler
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.
The case of Graham v Green [1925] 9TC309 concerned a man whose sole means of livelihood came from betting on horses at starting prices. Rowlatt J says at pages 313 and 314:
‘Now we come to betting, pure and simple… 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 a 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. It is extremely difficult to express, but it seems to me that people would say he is addicted to betting, and could not say that his vocation is betting. The subject is involved in great difficulty of language, which I think represents great difficulty of thought. 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”.’
[B]This shows that having expertise or being systematic (‘studying form’) is not enough to create a trade of being a ‘professional gambler’.[/B]
Some ‘professional gamblers’ do carry on a trade, for example, where they receive appearance money for appearing on television programmes. They are providing a service to a customer (the television production company) for reward. Whether their gambling winnings are proceeds of that trade would depend upon the facts.
BIM56900 - Measuring the profits (particular trades): Financial traders - instruments and shares: contracts for differences and spread betting
Companies
Contracts for differences (CFDs) are defined in CFM50380, and this definition includes financial spread bets. CFDs fall within the definition of derivative contracts for Corporation Tax purposes, so for companies the derivative contracts regime applies in most cases.
It is not usually necessary to identify whether the contract is a spread bet following the case of Morgan Grenfell Ltd v Welwyn Hatfield District Council [1995] 1 All ER 1. This case concerned two local authorities which entered into interest rate swaps with one another facilitated by Morgan Grenfell Ltd. The court considered whether or not the interest rate swaps were a gaming or wagering contract but concluded that where such contracts were entered into by parties or institutions involved in the capital market and the making or receiving of loans, the normal inference would be that such contracts were not gaming or wagering but were commercial or financial transactions.
Individuals and others not within the charge to Corporation Tax
For individuals and others not within the charge to Corporation Tax the position is different. In such cases you will need to examine the contract to see if it is a gambling or wagering one. There is guidance on this at BIM22016. [B]The profits or losses from gambling or wagering contracts are outside the scope of Income Tax (see BIM22015). However, this will not apply if the spread bet is used for a commercial purpose such as a hedge[/B] where the guidance at BIM56880should be followed.
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As far as I can tell you shouldn’t be taxable on spread bets even if you have a system and no other income. However if you are using a spreadbet as a hedge it is taxable.
Does anyone else in the UK have anymore information on this? I have a feeling that [B]legally[/B](as in if you went to court over it) HMRC can’t charge you income tax on spreadbetting but they don’t mind trying to scare people into paying it.
Could you explain a little more, how the taxation works there and why it’s so bad?