The following Personal Tax guidance note by Tolley provides comprehensive and up to date tax information covering:
Trade is defined in ITA 2007, s 989, as including “any venture in the nature of trade”.
The interpretation of the word ‘trade’ has been left to the courts, which have developed a number of tests, commonly referred to as the ‘badges of trade’, to determine whether somebody is trading.
Even a single transaction can be considered a trade. For instance, a taxpayer who purchases a property to renovate may be considered to be a property developer, depending on the facts. This would mean any profit on the eventual sale would be assessed to income tax rather than capital gains tax.
It is not always about the taxation of profits. For example, a taxpayer may wish to argue that he is trading so that he can utilise his loss against income (rather than against capital gains).
The distinction between trading and investment is more important than ever for individuals because of the large difference between the additional rate of income tax (45%) and capital gains tax for higher rate and additional rate taxpayers (20% or 28% for 2016/17 onwards depending on the type of asset subject to disposal).
Property businesses are taxed in the same way as trades and therefore the same tests are applicable.
The following is a summary of the key tests used by HMRC to identify whether the taxpayer is trading. They have been developed by case law and so are not exhaustive. You are free to suggest any other appropriate arguments to strengthen your case.
Some of the badges may point to trading and some may or may not be applicable. The weight given to each will depend on the facts of the situation.
In some circumstances, the existence of one single badge is enough to show trading.
**Free trials are only available to individuals based in the UK. We may terminate this trial at any time or decide not to give a trial, for any reason.
Access this article and thousands of others like it free for 7 days with a trial of TolleyGuidance.
Read full article
Already a subscriber? Login