Trading

Question 1

Facts
• operated profit making restaurant + educational classes and gymnasium at a loss
• Restaurant made a profit but there was no profit seeking motive
• Restaurant would have continued even if made a loss

Decision
• Gym and classes not trade
• Restaurant was a trade even though it would have been carried on if it made a loss

Reasoning
• N/A

Arguments
• Once a trade is established profits are chargeable to tax regardless of whether there was profit seeking motive

Answer 1

Grove V YMCA

Question 2

Facts
• bought spinning plant with objective of selling ASAP at profit

Decision
• Trading - adventure in nature of trade

Reasoning
• N/A

Arguments
• Isolated/one-off transaction can be a trade

Answer 2

Edwards v Bairstow and Harrison

Question 3

Facts
• Bought second-hand cargo ship which they converted for use as a fishing ship
• Sold converted ship for profit

Decision
• profit treated as trading profit

Reasoning
• purchase, refitting, selling-on were characteristics of ordinary trading of selling second hand articles

Arguments
• Isolated/one-off transaction can be a trade if it has similar characteristics to a similar trade

Answer 3

CIR v Livingston and Others

Question 4

Facts
• Woodcutter bought large quantity of whiskey for resale at profit
• sold through an agent in 3 lots within 2 years
• bought more whiskey than he or his family could drink

Decision
• trading

Reasoning
• Way whiskey sold exactly the same as any trader dealing in similar commodity
• bought more Whiskey than he could consume

Arguments
• isolated/one-off transaction can be trading if carried out in similar way to an actual trade
• nature of asset is important. In this example only advantage from having such large quantity would be to sell it

Answer 4

CIR v Fraser

Question 5

Facts
• Made profit from buying and selling a series of four cotton mills

Decision
• collectively the four transactions were a trade

Reasoning
• If there is more than one transaction and the patterns appears as a series of related transactions which take place over a short period of time argument for trading stronger

Arguments
• multiple transactions are a characteristic of trade

Answer 5

Pickford v Quirke

Question 6

Facts
• Individual sold a driving school
• claimed they made a capital profit
• established and sold around 30 more driving schools

Decision
• operated a trade on later sales and first one as well

Reasoning
• his intention was found to be running a business of buying and selling driving schools
• he may not have had this intention in the beginning but by the time he sold the first one the intention was established

Arguments
• Later transactions of the same sort can determine nature of the first

Answer 6

Leach v Pogson

Question 7

Facts
• Businessman purchased 1 million toilet rolls
• He sold them all in a single transaction

Decision
• adventure in the nature of trade

Reasoning
• an adventure in the nature of trade could be the only reason for buying and selling such a large quantity
• bought more toilet roll than he could use so only way to dispose of them was in a trading transaction
• Intention to make profit present at time of purchase

Arguments
• nature of asset important. In this situation only way to dispose of toilet roll was to sell it

Answer 7

Rutledge v CIR

Question 8

Facts
• Bought brandy from government who was unable to dispose of it
• Merchants blended and repackaged the brandy to make it more marketable
• Merchants argued not trading because this was a speculative investment

Decision
• Trading profits

Reasoning
• Speculative investment argument dismissed because brandy was purchased with a view to transport, modify and sell

Arguments
• buying one item and breaking it down to smaller/separate components and indication of trading
• in this example they re-casked the brandy into smaller barrels to make it easier to sell
• Modifying asset to make it more marketable is a characteristic of trade

Answer 8

Cape Brandy Syndicate v CIR

Question 9

Facts
• Bought large quantity of surplus linen after WW1
• Hoped to sell it to a company but couldn’t so started advertising to public to put company under pressure
• Employed people to sell, kept business ledgers, paid wages

Decision
• Trading profits

Reasoning
• Guy claimed it was gambling but the profit seeking motive and sales operations suggested it was trading

Arguments
• organising in a way similar to a regular trade (staff, advertising, bookkeeping) can be indication of trade

Answer 9

Martin v Lowry

Question 10

Facts
• bought silver bullion
• financed purchase with a loan with very high interest rates which he couldn’t pay with his existing funds
• He needed to sell the bullion quickly, he did and made a large profit

Decision
• trading transaction

Reasoning
• if someone borrows money to buy an asset this can be an indication of trading especially if the loan can only be repaid out of the sale proceeds
• a short term loan can indicate an intention to resell quickly, particularly if interests rates can’t be funded in any other way
• silver bullion doesn’t yield income (so it’s not an investment) and not something you’d buy for personal enjoyment

Arguments
• source of finance can determine whether trading or not
• Nature of asset important

Answer 10

Wisdom v Chamberlain

Question 11

Facts
• Mum wanted to live near school daughters went to
• Had to buy more land than she wanted to
• Divided up the land and sold it

Decision
• trading

Reasoning
• Primary motive at time of acquisition was divide and sell land to make a profit and get own piece of land under for under MV
• Obtaining land to live on became secondary motive
• Purpose was to obtain land to live on but steps taken were trading

Arguments
• in equivocal cases you can’t rely on facts (badges of trade) alone so have to consider the person’s motive which could determine nature of transaction

Answer 11

Iswera v CIR

Question 12

Facts
• Shoe making company bought and sold gilts over 9 months
• Made a loss

Decision
• trading loss

Reasoning
• N/A

Arguments
• N/A

Answer 12

Cooper V C & J Clark Ltd

Question 13

Facts
• Fruit and veg importer made loss on buying and selling shares
• Argued they had clause in memorandum that let company trade in shares
• Crown contended there was no such clause and company was gambling instead

Decision
• Company carrying on separate trade in securities

Reasoning
• Company unlikely to have clause that lets it gamble
• If a trading company is doing something other than their usual trade, that isn’t investments, then likely to be carrying on a separate trade
• if memorandum permitted activity and activity meets criteria for trade then its a trade

Arguments
• Existing company can have separate trade

Answer 13

Lewis Emmanuel & Son Ltd V White

Question 14

Facts
• Smuggled whisky to America during prohibition
• Operation involved raising funding, arranging shipping, defrauding customs
• Made a profit

Decision
• Adventure in nature of trade

Reasoning
• Activities in the case organised in the same way as a trade

Arguments
• Illegality doesn’t prevent taxation of profits but a trade/taxable source must be identified first
• Smuggling alcohol for sale is a trade as it has commercial character (see Ransom v Higgs) and sufficient badges of trade
• Drug trafficking is also a trade (judge said this) as it has commercial character (see Ransom v Higgs) and sufficient badges of trade

Answer 14

Lindsay, Woodward & Hiscox V CIR

Question 15

Facts
• Supplied gambling machines to pubs and other premises which were illegal in 1920s
• Had agreement with owners to share profits of machines
• Contended he couldn’t be taxed on profits from venture because it was illegal

Decision
• Trading profits

Reasoning
• Letting out machines in commercial way with view to make profits hallmark of trade
• Being illegal doesn’t mean profits were less taxable

Arguments
• Operating illegal gambling machines is a trade as it has commercial character (see Ransom v Higgs) and sufficient badges of trade

Answer 15

Mann V Nash

Question 16

Facts
• Taxpayer regularly attended races as bookmakers
• contended profits were not taxable because they were illegal

Decision
• Trading profits

Reasoning
• Taxpayer made a profit and the source was the vocation of bookmaker

Arguments
• Systematic business of receiving stolen goods (a fence) are taxable
• illegality of activity doesn’t prevent charging profits to tax

Answer 16

Partridge V Mallandaine

Question 17

Facts
• Jockey gets cash present for winning race from owner of horse rode

Decision
• Trading income

Reasoning
• No personal element (gift made because jockey won race), so taxable

Arguments
• A voluntary payment to someone for services contracted is trading/professional receipt

Answer 17

Wing V O’Connell

Question 18

Facts
• Company had falsified wage account
• Auditor didn’t notice and paid compensation for being negligible even though they considered they had no legal liability
• Company argued compensation wasn’t trading receipts

Decision
• Compensation received were trading receipts

Reasoning
• Compensation seen as similar to if employees refunded misappropriations or if the quarry received the compensation through and insurance claim (these would be considered business receipts)
• compensation was business receipt because came in the course of the business

Arguments
• Voluntary receipts received in course of business are taxable

Answer 18

Grey V Lord Penrhyn

Question 19

Facts
• Ice rink let curling club use rink
• curling club made voluntary donation to rink to cover extra costs of curling

Decision
• trading receipt

Reasoning
• Payment made because club worried company would stop providing curling facilities so it was held that the donation was to supplement the companies trading receipts therefore it was also taxable

Arguments
• Voluntary receipts received to help pay for expenses can be taxable

Answer 19

CIR V Falkirk Ice Rink Ltd

Question 20

Facts
• Estate agent expected to receive letting agency for site they negotiated purchase of (this was normal practice) but didn’t
• company offered estate agent ex gratia compensation for loss of letting agency instead
• estate agent rejected first offer saying it was too small but accepted second higher offer

Decision
• Ex gratia payment was trading income

Reasoning
• Payment related to work already done and was not unexpected or unsolicited
• Payment was earned as it was reward for previous work and therefore taxable

Arguments
• Earned voluntary receipts (i.e. ones that relate to specific work done) are taxable
• deserved voluntary receipts (i.e. acknowledgement of past work, regret of business connection termination) are not taxable

Answer 20

McGowan V Brown and Cousins

Question 21

Facts
• Government scheme to supplement profit of millers trading in 1939
• Miller from 1941 didn’t strictly fall within scheme but later became eligible
• Miller applied after ceased trading and received payment

Decision
• trading receipt

Reasoning
• Payment was designed to augment profits (so didn’t matter what scheme it arose from) and therefore deemed to arise from the miller’s trade

Arguments
• Voluntary receipts that augment profits are taxable

Answer 21

Severne V Dadswell

Question 22

Facts
• Auditor gave up some work in return for compensation

Decision
• Part of compensation was taxable under ITEPA and the rest was taxed under ITTOIA (i.e. trading income)

Reasoning
• ITEPA element was part of compensation that related to loss of office
• ITTOIA element was part of compensation that related to general accountancy work and held to arise from the trade

Arguments
• Where receipt arise from loss of office/employment it will be taxable under ITEPA

Answer 22

Ellis V Lucas

Question 23

Facts
• Pawn broker provided loans secured on items (pledges) which pawnbroker could sell if loan not repaid after certain amount of time
• If pledge sold for more than loan amount the borrow could reclaim the surplus within 3 years or 6 years (statute of limitations) depending on amount of original loan
• if loan was below certain amount pledge became pawnbroker property and proceeds from sale were trading receipts

Decision
• unclaimed balances were trading receipts

Reasoning
• 3 or 6 years amounts weren’t trading profits at time of receipts (as technically didn’t belong to pawnbroker yet)
• nature of receipts changes after 3/6 years (i.e. when borrower no longer had legal right to reclaim) and legal ownership passes to pawnbroker
• The receipts were also basically coming from the pawnbrokers trade, because pawnbrokers make profit from people failing to redeem their pledge. This means the receipts were trading receipts when first received but they just weren’t taxable yet
• Contrasts Morley V Tattersall where statute of limitation didn’t apply and unclaimed amounts weren’t part of course of ordinary trade

Arguments
• Where statute of limitation applies ownership of funds transfers, which could change nature of unclaimed funds from non-trading to trading

Answer 23

Jays the Jewellers Ltd V CIR

Question 24

Facts
• Company’s trade was gold concessions

• one year company traded gold concessions for shares in public companies

Decision
• value of shares at end of accounting period in which they were received trated as trading receipt

Reasoning
• Shares were received as consideration
• When valuing assets need to take into account all the factors that influence their value (marketability, prospective yield, number of shares held, etc.)

Arguments
• In trading transactions, goods/services received as consideration should be included as trade receipt based on their realisable value

Answer 24

Gold Coast Selection Trust Ltd V Humphrey