Chapter 3 trading income Flashcards
3.2 The definition of trading
A trade A trade is defined as including any venture in the nature of trade. This is not defined in legislation but the courts have developed tests known as the badges of trade.
If an asset is bought for personal use or as an investment any future disposal is likely to be capital gains.
3.3 Badges of trade
Profit seeking motive – this is not the existence of profit but the motive to earn one. The taxpayer must demonstrate the motive rather than the existence of profit to establish that a trade is being carried on.
Frequency and number of similar transactions – the more similar transactions the more the likelihood of trading. This was seen in the court case Pickford v Quirke (a taxpayer sold items for a mill and repeated this process, so was considered trading income and taxable as income tax and not capital gains tax).
Connection with existing trade – if there is a link between your job and the transaction, HMRC are more likely to consider this as trading income.
Financing arrangements – if an asset is purchased on a short-term loan which the taxpayer is unable to fund without selling the asset, HMRC can argue the asset was purchased to sell and is taxed as trading income. This was seen in the court case Wisdom v Chamberlain.
Length of ownership – if you own an asset for a long period of time it is easier to say it was for personal use and for it to be taxed as capital gains.
The existence of a sales organization – shown in court case Cape Brandy Syndicate.
Reason for the acquisition/ sale – it is necessary to look at how the asset was acquired (purchase, gift, inheritance) and the reason for the sale of the asset.
