Badges of trade

By Tolley

The following Corporation Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Badges of trade
  • The definition of trading
  • The badges of trade
  • Land transactions
  • Anti-avoidance provisions
  • Share dealing

The definition of trading

Trade is defined in CTA 2010, s 1119, as including 'any venture in the nature of trade'.

The interpretation of ‘trade’ has been left to the courts, which have developed a number of tests, known as the 'badges of trade', to determine whether an activity is trading or investment in nature. Please note that the definition of trade for income and corporation tax purposes is different to the definition of trading for CGT and IHT ― for more on this see the Conditions for entrepreneurs’ relief guidance note.

For individuals, the distinction is more important than ever because of the large difference between the top rate of income tax, which is applicable to trading activities (45% for the 2013/14 tax year onwards) and the top rate of capital gains tax, which is applicable to investment activities (20% or 28% for 2016/17 onwards depending on the type of asset subject to disposal).

For companies, the distinction is less important as both gains and income are taxed at the same rate. However, indexation relief over a period of years may greatly reduce any chargeable gain. The existence of a trade could impact the characterisation of losses generated by a company, and therefore the way in which such losses can be utilised. Furthermore, the re-characterisation of significant gains as trading income could leave prior year or in-year capital losses stranded within that company or group.

The remainder of this guidance note focuses on badges of trade in relation to companies. However, it should be noted that much of the case law in this area is old or relates to individuals. It is perfectly possible that a modern company case might be viewed differently by the courts and each case is dependent on the particular facts.

The badges of trade

In some circumstances, the

More on Trading company computations: