This article looks at the taxation of illegal and immoral activities – as for fattening, all that can be said about that is that food is zero rated for VAT purposes, unless it is particularly enjoyable, like sweets or a meal in a restaurant.
Just Because it’s a Crime Doesn’t Mean it’s Tax Free!
Over the years, a variety of criminal activities have been the subject of tax cases as a result of claims that the profits from them were not taxable:
A bootlegger running drink into Ontario in Canada (the only state to join with the USA in the “prohibition” of the 1920s) was found to be taxable because he was a trader buying and selling for a profit, and the Court said he “cannot found upon the elements of illegality to evade the tax”
The operator of “one armed bandit” fruit machines (which were illegal in the 1930s) was also taxable on his profits on the same logic as the bootlegger
Illegal “street” bookmakers were also taxable, again because they were clearly trading.
A prostitute’s claim that if the government taxed her on her profits they would be living off immoral earnings (or pimping, as you and I call it, which is of course illegal) was also dismissed. This case is my personal favourite as I was peripherally involved in it as a very junior tax inspector, and I found “Miss Whiplash” (her trading name) much more interesting than the pubs and newsagents that were the subject of most of my investigations.
Drug dealing is a trade – as a tax inspector, I was once involved in taxing drug dealers on their profits
Just Because Crime Pays Doesn’t Mean it’s Taxable!
Burglary is not taxable as a trade – because although the burglars may sell the items they have stolen, they did not acquire them in the way a trader does (I have always thought this rather dubious myself, but who am I to argue with Lord Denning?). Note that the “fence” who receives and sells the stolen goods is taxable, because he is buying and selling
Blackmail and protection rackets are not trades – they do not involve buying and selling, and agreeing not to publish the compromising photos or not to smash up the pub is not the provision of a service in any normal sense of the word.
What About Expenses?
There is specific legislation (section 577A ICTA 1988) which prevents the deduction of payments which are themselves criminal offences (such as bribes) or which are made to someone who commits a criminal offence by receiving them (such as payments for “protection”).
This does strike me as rather unfair in some cases – we have already seen that the bullies who demand protection money are not taxable on it, and now the poor pub landlord cannot have a deduction for the payments he makes to them!
If I win the lottery, or if I bet on a racehorse and it wins, I am not taxable on my winnings, and this has been held to apply even to a “professional” gambler who spends his whole time studying form and making bets and makes his living at it.
In some circumstances, however, gambling profits are taxable.
The obvious example is a bookmaker who is carrying on a trade, but there have been a couple of curious cases involving betting:
A golf professional employed by a golf club successfully argued that his winnings from bets with his clients on who would win a round of golf were not taxable, BUT
The proprietor of a nightclub was held to be taxable on the money he won from his clients in the club’s card room
What is the difference between these two cases? The answer shows that you need to look beyond the headlines of the report of a tax case.
Whereas the golf pro was a respectable sort of chap, the judge was highly suspicious of the proprietor of the nightclub (which club, I was shocked when she told me, my mother had visited on several occasions when she was a young woman!). The whole business of gambling winnings was his explanation for a large amount of cash he was unable to account for when he was investigated by the taxman, and it appears that the judge was determined to stretch the law in order to get him!
Which goes to show that it may be illegal, or immoral, but whether it is taxable or not is another matter entirely!