Why are gambling winnings not taxed in the United Kingdom?

Question

I recently moved to England and was somewhat surprised to learn that gambling winnings are not taxed. A Google search reveals this article from Forbes that explains that such a tax would be at most revenue neutral. According to the author, the UK would want also to give tax credits for losses. Then since the bookies take a slice, there will be more losses than winnings, hence more credits than taxes, and the government will lose money on the whole.

One obvious objection is that tax policy is up to the government, and rates can presumably be tuned so that credits for losses are not as substantial as the taxes on gains.

It is interesting that the article focuses on spread betting in the financial industry and its parallels to more traditional forms of gambling like horse racing and poker playing. I am wondering if the real reason that gambling winnings are not taxed is to make the UK more attractive to the financial industry, so that the capital gains tax rate here can be offset by spread betting?

Answer 1

Wow, so my understanding was way out of date. Here's a history of taxation and gambling in the UK, which includes what I though was still the case;

The first shops opened in 1961 but under the condition that a new levy was to be charged at 6.75% to bookmakers. Bookies passed this on to punters in the form of a 9% betting tax. The tax could either be paid at the time of placing a bet or on the winnings instead. A levy of 9% on winnings can be a lot of money so most people elected to pay the tax on the stake.

In short winnings are not taxed because it is considered more efficient to tax businesses that provide the ability to gamble than it is to tax people gambling regardless of whether they win or lose.

By requiring the Business to pay the tax, collection of the duty is passed onto a third party, meaning HMRC doesn't need to keep track of each individual bet made by large numbers of individual punters. Each facet of the Gambling industry pays these taxes, or duties at slightly different rates. The National Lottery for instance includes a 12% duty, while Machine Game Duty seems less straight forwards.

This duty, or gambling tax is in addition to other taxes these businesses would expect to pay in the course of their operation.

Answer 2

Forbes that explains that such a tax would be at most revenue neutral. According to the author, the UK would want also to give tax credits for losses. Then since the bookies take a slice, there will be more losses than winnings, hence more credits than taxes, and the government will lose money on the whole. . . .

I am wondering if the real reason that gambling winnings are not taxed is to make the UK more attractive to the financial industry, so that the capital gains tax rate here can be offset by spread betting?

This certainly isn't necessarily true.

For comparison sake, to illustrate this point as a proof of concept, the taxation of gambling at the federal law in the united-states avoids this issue.

In the U.S., for federal income tax purposes (and usually for state and local income tax purposes as well, where state and local income taxes exist), gambling winnings are taxable income and institutional gambling forums like casinos and lotteries have to issue information returns reporting that income, while gambling losses in a calendar year are deductible only to the extent of gambling winnings in the same calendar year.

Tax law compliance is one of the reasons that U.S. casinos use chips rather than actual currency, in most of their day to day gambling operations.

So, if you win $10 million in the lottery, this is taxable income reported to the government, and you can deduct the money you spent in that calendar year on lottery tickets that were losers from your winnings. But, if you win $500 in the lottery, but spend $1500 on losing lottery tickets, you can't use your net gambling losses to reduce your total taxes owed and can't even carry your losses forward to future years, or backward to apply to past gambling winnings income.

Thus, net winners are taxed on net winnings (and usually more because usually net winners can't prove up all of their gambling losses), while gambling that results in a net loss is treated as a personal consumption expenses like a movie ticket or admissions fees to a theme park. This results in net revenue for income tax purposes to the federal government.

From a revenue perspective, taxing net gambling winnings really isn't that big of a deal in the big picture. But, net gambling winnings are taxed anyway in order to assure equity between individual taxpayers. It was considered unfair to allow big winners in a lottery or at a casino to get that "undeserving" money tax free, while taxing people on "hard earned" money from working or running a business, for example.

The U.S. tax system has not had any real difficulty distinguishing between gambling winnings and losses from financial industry winnings and losses.

This isn't to say that state and local governments don't also directly tax gambling businesses as an important source of revenue in much the same way that the U.K. does.

When these businesses are not subject to Indian Reservation jurisdiction, they do just that. Gambling industry taxes, for example, are very important to the governments with jurisdiction over the Las Vegas strip (which incidentally is not in the City of Las Vegas proper). Similarly, the promise of state tax revenues earmarked for particular purposes was one of the important incentives for voters in Colorado to vote to legalize certain kinds of gambling in Colorado in a state ballot issue on the topic (which was necessary because in Colorado all new taxes must be approved by voters).

Gambling at Indian Reservations in the U.S. (which are sometimes beyond state and local government taxing and regulatory jurisdiction which is why so many casinos were located in Indian Reservations to start with) is subject to tribal taxation (or more often, involves businesses directly owned by a tribe), and to federal U.S. income taxation as described above.