Chapter 2: Sole Traders - Trade Profits - badges of trade Flashcards
Income tax v capital gains tax
Sale of an item is considered to be part of a trade
Suffer Income Tax
Income tax v capital gains tax
Sale of an item is NOT considered to be part of a trade
Capital Gains Tax
HMRC uses badges of trade to conclude whether the individual is trading.
What are the 9 badges of trade?
Profit Seeking Motive
Number of transactions
Nature of asset
Existence of similar trading transactions or interests
Changes to the asset
The way the sale was carried out
The Source of finance
Time between purchase and sale
Method of acquisition
Badges of trade - Profit seeking motive
The the only reason for buying an asset was to sell it for profit, then it likely the profit will be treated as trading income
Badges of trade - Number of transactions
How many times has the individual carried out similar sales? Many sales of the same type are likely to be viewed as a trade.
However one of sales are more likely to be treated as gains
Badges of trade - Nature of the asset
Is the asset being held for investment purposes? If so, any profit is likely to be held as a capital gain. Otherwise the profit is likely a trade.
Where the items purchased have no personal use to the individual then this usually indicates purchases for a trade
Badges of trade - Existence of similar transactions or interests
If an individual selling the asset which they claim to be held for investment purposes also runs a trade selling the same type of assets, this is more likely to be considered a trading transaction, for example an antiques dealer selling a painting
Badges of trade - Changes to the asset
If the owner of the asset being sold has done any supplementary work (improvements, repackaging or even marketing) then the profit made on selling the asset could be treated as trading income
Badges of trade - The way the sale was carried out
The sale transaction carried out in the same way as that of an undisputed trader, this is more likely to be a trade. For example, selling an asset through an agent would be typical of a trading organisation.
Badges of trade - The Source of finance
If money is borrowed to buy the asset and will be repaid from the proceeds of selling the asset this is likely to indicate trading.
Badges of trade - Interval of time between purchase and sale
If an individual has owned an item for a long period of time, then is likely to be viewed as a gain. If it is a shorter period of time, then any profit is more likely to be treated as trading income.
Badges of trade - Method of acquisition
If the individual selling the assets acquired them unintentionally (for example they were inherited or unwanted gifts) and so is selling them, then is is likely that any profits arising on sale will be treated as gains.
The reason for acquisition and sale could indicate a trade; an intentionally purchase and planned sale will indicate a trade.
