B1.401 When are trade profits taxed and how do we define a trade?
Income tax is charged on the profits of a trade, profession or vocation1. Corporation tax is charged on the profits of a trade2. It follows that it is necessary to recognise what constitutes a trade, profession or vocation.
However, before deciding on whether an activity or set of activities constitutes a trade or a profession or a vocation, it is first necessary to ask whether a charge under the rules relating to employment income (for income tax purposes), or to income from property, or to income from holding an office (for corporation tax purposes) arises. This follows from the priority rules in ITTOIA 2005, s 4 and CTA 2009, s 201 (see B2.101).
The legislation does not define the terms 'profession' and 'vocation', which HMRC states take their ordinary meanings3, and has only a limited definition of a 'trade'. The distinction between a 'trade' and a 'profession or vocation' is important for example in the valuation of work in progress at discontinuance4, and in relation to expenses for patents, designs and trademarks5). For income tax purposes there is no practical distinction between a profession and a vocation.