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A Gamble Worth Taking?

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It was with a nod of approval from Moira Stuart (or so I imagined) that I last night filed my tax returns. Over the past few weeks I have been blogging about the government's approach to spending our hard earned taxes; offering ideas and solutions to help sustain the society we all want to live in. Of course that is only part of the challenge. So let's talk about tax.

In the not too distant past the 2005 Gambling Act repealed the Betting, Gaming and Lotteries Act of 1963, the Gaming Act of 1968 and the Lotteries and Amusements Act of 1976. It changed the old system of a 9% tax on stakes gambled as part of agreement to prevent gambling organisations going offshore. Rather cynically, the deal was a result of intense lobbying from the gambling industry which persuaded government to abolish the old tax; predicting that an increase in gambling would increase turnover by 40%. The consequent increase in corporation tax would more than compensate H.M Revenue for the loss of duty.

Since then we have seen the emergence of a new player in the market. This new player masquerades as a gambling product for tax purposes alone. Strong claims you might say but these are not mine but those of the player themselves.

I am talking about financial spread betting. Originally developed in the US to help gold traders avoid UK exchange controls, the practice has now morphed into gambling. This product invites the participants 'bet' on things like small movements in foreign exchange rates, share values and commodity prices. It is highly specialised, complex and due to how highly leveraged the gamble is, the player can easily lose substantially more than their original stake. Of course the fact that the product is for sophisticated customers and is high risk does not distinguish it from other gambling products. The manner in which it is marketed however does.

Financial spread betting is at the centre of a substantial marketing campaign on the major financial channels and across the internet. It is marketed as a serious investment vehicle and is regularly described as a high risk, highly leveraged, tax free investment tool. In some traders' guides it is promoted as a tax planning tool. One firm alone turned over £300million in 2010. And the lion's share of the market is right here in the UK.

Whether one agrees with gambling or not, we do have to accept that recreational gambling is very much a feature of British society. However, financial spread betting represents itself as something other than recreational. It is a professional tool which reflects the very worst aspects of a failed financial system. In its marketing it manages to tick just about every box for undesirability.

The words 'high risk' and 'highly leveraged' should no longer feature widely in relation to investment opportunities. And given the current anger with the financial system, even less so the words 'tax free'.

Let me be clear; I am not talking about banning this product. That would be an intolerable attack on personal freedom. However, we should treat this in the same way we treat other forms of undesirable behaviour. We already use the tax system to discourage smoking, drinking and to slow down global warming. That income in turn helps meet the associated costs that arise from those who participate in these activities. We should do the same with the financial spread betting industry.

High risk, leveraged, casino style financial services have wreaked havoc on our society and, in its wake, the tax payers are now footing the bill. If we are truly "all in this together" then the traders who use this tool should contribute alongside the rest of us. A reintroduction of the 9% rate on trades is neither onerous nor is it difficult to collect given the fact that we are talking about a financial organisation. It would not even place us at an international disadvantage. And somehow I imagine most common taxpayers, myself included, would welcome the move.