Chapter 2 - Trading Income & BOT Flashcards
Trading Income Summary
Trading Income: encompasses income from a trade and income from a profession or vocation. Trading income is charged to income tax.
Definition of Trading
A trade: any venture in the nature of trade. Trade is not fully defined, so the badges of trade are applied as a test.
Badges of Trade
Profit Seeking Motive Frequency and Number of Transactions Modification of Asset to Make More Saleable Nature of the Asset Connection with an Existing Trade Financing Agreements Length of Ownership Existence of Sales Organisation Reason for Acquisition/Sale
Profit Seeking Motive
Must establish a desire and motive to make a profit, rather than whether there is one or not.
Frequency and Number of Transactions
If a profit is made once, it’s less likely there’s a trade. If a person makes transactions regularly then it’s more likely that there is a trade being carried on.
Modification of Asset to Make it More Saleable
If someone buys an item and sells it without changing it, it’s likely not a trade. But for example if someone buys a car, resprays it, changes the engine and sells it, it’s more likely to be a trade.
Nature of the Asset
Some assets can only conceivably be bought for the purpose of a trade.
Connection with an Existing Trade
Where a direct link exists between a trade being carried on and the sale of an asset eg a mechanic selling a car
Financing Agreements
If an asset is bought on a short term loan that can’t be paid off without the asset being sold again, then HMRC can argue the asset was bought for the purpose of selling ergo a trade is being carried on
Length of Ownership
If you have owned something for a long time, it’s easier to argue you bought it for your own consumption. Short ownership is more likely to suggest a trade.
Existence of a Sales Organisation
If someone has a helpline/website/marketing material etc
Reason for Acquisition/Sale
Was the asset bought, gifted or inherited, why are they being sold?
FROGSPAWN
Finance Repetition Organisation Gap Similar activities Profit seeking motive Alterations made to sell Way the asset is acquired and reason for sale Nature of asset
