Are you trading?

Trading income is taxed for both income tax and corporation tax purposes. In order for a tax charge to arise under the trading income rules, there must be a trade. It is therefore necessary to understand what constitutes trading, and when a trade commenced or ceased.

Indicators of trade

To determine whether a trade exists, historically the courts have looked for the presence of absence of certain key defining features. In 1955, the Royal Commission of Profits and Income Tax reviewed existing case law and identified six ‘badges of trade’. The concept has evolved over time, and the following indicators can be used to provide an overall impression as to whether a trade exists.

Profit-seeking motiveAn intention to make a profit supports trading, but by itself is not conclusive.
The number of transactionsSystematic and repeated transactions suggest a ‘trade’
Existence of similar trading transactions or interestsTransactions that are similar to those of an existing trade may themselves be trading
Change to the assetsRepairs, modifications or improvements to make the assets more easily saleable or saleable at a greater price may suggest trading
The way in which the sale was carried outThe sale of an asset in a way which is typical of trading organisations may suggest trading, whereas a sale to raise emergency cash is less likely to indicate trading
The source of financeWhere money has been borrowed to purchase the asset and the funds can only be repaid by selling the asset, this may suggest trading – money may be borrowed to facilitate the purchase of an asset at a profit
Interval between sale and purchaseAssets that are the subject of trade will normally be sold quickly; an intention to sell an asset shortly after purchase will support trading, whereas an asset that is held indefinitely is less likely to be the subject of a trade
Method of acquisitionAssets that are inherited or acquired as a gift are less likely to be the subject of a trade.

Overall impression

It is important to note that there is no single ‘badge’ that provides conclusive proof of a trade – rather, it is a question of looking at the characteristics of trading and the extent to which they are present or absent to form an overall impression of whether there is a trade. The weight attached to each ‘badge’ will vary depending on the particular circumstances and the type of business.

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