Badges of trade

Produced by Tolley

The following Owner-Managed Businesses guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Badges of trade
  • The definition of trading
  • What are the badges of trade?
  • Summary
  • 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
  • More...

The definition of trading

Trade is defined by statute as including “any venture in the nature of trade”.

Further interpretation of the statutory definition of ‘trade’ has been left tothe courts, which have developed a number of tests, known as the ‘badges of trade’, todetermine whether an activity is trading or investment in nature. It should be noted 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 business asset disposal relief guidance note. One important area where the badges of trade is frequently tested in the courts is whether a business is trading or investing in land and property, this topic is analysed further below and in the Property investment or trading? guidance note.

For individuals, the distinction can be more important because of the large difference between the top rate of income tax, which is applicable totrading profits and the top rate of capital gains tax, which is applicable toinvestment activities, the latter usually being charged at a much lower rate.

For companies, the distinction is less important as both gains and income are taxed at the same rate. However, 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.

Much of the case law in this area is old or relates toindividuals however, the principles may be applied totrades carried on by companies. It is perfectly possible that a modern case might be viewed differently by the courts and each case is dependent on the particular facts.

See Simon’s Taxes B1.403.

It should be noted that some activities are tobe treated as trades by statutory authority (eg farming and market gardening,

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