Badges of trade

By Tolley

The following Owner-Managed Businesses 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 ITA 2007, s 989, 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 from 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 (45%) and CGT for high earners (20% or 28% for 2016/17 onwards depending on the type of asset subject to disposal).

The badges of trade

The badges of trade are:

  • profit seeking motive
  • frequency and number of similar transactions
  • modification of the asset in order to make it more saleable
  • nature of the asset
  • connection with an existing trade
  • financing arrangements
  • length of ownership
  • the existence of a sales organisation
  • reason for the acquisition / sale

See BIM20200 onwards and the Checklist ― badges of trade. See also Simon’s Taxes B1.403 (subscription sensitive).

Profit seeking motive

When a person enters into a transaction, it is necessary to identify whether there is a profit seeking motive. HMRC is more likely to challenge the tax treatment of the transaction if there is a profit.

In Rutledge v CIR, an individual who was primarily carrying on a cinema business, purchased and sold a quantity of toilet paper in a single lot, thereby,

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