Trading Income (Non-Blackwell Notes) Flashcards
Where are the rules about trading income codified?
ITTOIA 2005 Part 2 (ss 5 to 259).
What is the basic provision of ITTOIA 2005 and what does it say?
S 5: ‘Income tax is charged on the profits of a trade, profession or vocation.’
What does s.7(1) of ITTOIA 2005 say?
Imposes the charge on the full amounts of the profits of the tax year.
What does s.8 of ITTOIA 2005 say?
Provides that the person liable for any tax charged under these provisions is the person receiving or entitled to the profits.
What does the case of Edwards v Bairstow and Harrison (1956) tell us?
The court can and will reverse a tribunal decision, on the question of whether someone was trading, if it is of the opinion that (per Lord Radcliffe) ‘the facts found are such that no person acting judicially and properly instructed as to the relevant law could have come to the determination under appeal.’
What factors do we consider with the question ‘trade or no trade?’
The ‘badges of trade’ graphically described by the 1954 Royal Commission on Taxation.
What is the 1st badge of trade?
Consider what is sold.
Generally, if the subject matter is such that the purchaser cannot either use it personally or derive an income from it or derive pleasure from it that points towards trading.
What happened in Rutledge v IRC (1929)?
The taxpayer bought a million rolls of toilet paper in Berlin for £1,000, and shortly afterwards in England sold the whole lot to one purchaser at a profit of over £10,000. It was held that this was an adventure in the nature of trade.
The fact that this was a one-off transaction did not prevent its being held as trading.
What is the 2nd badge of trade?
The length of ownership. A quick resale points towards trading.
What is the 3rd badge of trade?
Repetition. A kind of transaction which might not be considered a trade in a one-off situation, might be found to be a trade if the transaction is repeated several times.
What happened in Pickford v Quirke (1927)?
A director of a spinning company bought the shares of a mill-owning company and then sold the assets of that company at a profit. He then took part in three similar transactions.
Court of Appeal held that he was carrying on a trade, even though each transaction by itself was not an adventure in the nature of trade.
What is the 4th badge of trade?
Supplementary work in connection with the realised property.
What happened in Martin v Lowry (1927)?
The taxpayer purchased the entire surplus stock of aeroplane linen from the Government. He found difficulty selling it, and so had to advertise extensively, rent offices and engage a manager and staff.
It was held that the operations constituted trading.
What happened in CIR v Livingston (1927)?
Three individuals bought a cargo steamer, converted it, and sold it at a profit. The Court of Session held that this was a trade.
What is the 5th badge of trade?
Why the trade took place. There may be some explanation as to why something is sold which negatives the idea of trading.
What happened in West v Phillips (1958)?
A builder built some houses to hold as an investment and some for resale. Later on he decided to sell the investment houses, and he did so through the same organisation that sold his trading houses.
Court of Appeal reversed the decision that this constituted trading because the taxpayer decided to sell his investment houses because of rent control and the rising cost of repairs and higher taxation.
What is the 6th badge of trade?
Motive. The absence of an intention to make a profit points against trading.
What does ITTOIA 2005 s.9 say?
“All farming and market gardening in the UK shall be treated as carrying on a trade…”
What did CIR v Maxse (1919) say?
The hallmark of a ‘profession’ is the use of intellectual skill, with or without manual skills.
How is a ‘vocation’ regarded under the trading rules?
‘Vocation’ is a calling, the way in which someone spends his life.
What is the significance of the case of Partridge v Mallandane (1886)?
The leading case of what is considered a vocation under the trading rules.
What will courts nowadays more readily accept?
They will readily accept more than in the past that accounts prepared in accordance with accepted principles of commercial accountancy are adequate for tax purposes as a true statement of the taxpayer’s profits.
But some items may conflict with statutory or case law.
What did Sir Thomas Bingham MR say in Gallagher v Jones (1933)?
Found it hard to understand how any judge -made rule could override the application of a generally accepted rule of commercial accountancy which:
(a) applied to the situation in question;
(b) was not one of two or more rules applicable to the situation in question, and;
(c) was not shown to be inconsistent with the true facts.
What does ITTOIA 2005 s.25(1) say?
‘The profits of a trade must be calculated in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law, in calculating profits for income tax purposes.’