In calculating the profits of the lottery for tax purposes, the
only amounts excluded from trade receipts under SP/C1 are the
donations made directly by the lottery customers to the ultimate
beneficiary. These amounts are measured by the percentage or
fraction of the stake money for each ticket or chance which is
specified as a donation at the point of sale.
Some societies make profits from their lotteries over and
above the donation element in the ticket or chance and these
profits may be passed to the beneficiary club as an additional
donation. There is, however, a crucial distinction for tax purposes
between a donation made by the customer buying the ticket or chance
(where the society simply acts as a conduit in passing the donation
on to the club) and the situation where there is a donation of
realised trading profits from the lottery.
Where the lottery makes a profit (after excluding from its
trade receipts the donation element specified at the point of sale
in any ticket or chance) then this profit is taxable. Any further
donation out of this profit is not itself allowable as a trading
expense.
Normal Schedule D Case 1 principles should be followed in
considering the taxability of amounts received from lotteries in
the hands of the beneficiary club. The treatment in the hands of
the beneficiary club has to be considered independently of the
question of whether donations received by the society promoting the
lottery have been excluded from the trading receipts of the lottery
under SP/C1.
