Trading Income (Non-Blackwell Notes)

Question 1

Where are the rules about trading income codified?

Answer 1

ITTOIA 2005 Part 2 (ss 5 to 259).

Question 2

What is the basic provision of ITTOIA 2005 and what does it say?

Answer 2

S 5: ‘Income tax is charged on the profits of a trade, profession or vocation.’

Question 3

What does s.7(1) of ITTOIA 2005 say?

Answer 3

Imposes the charge on the full amounts of the profits of the tax year.

Question 4

What does s.8 of ITTOIA 2005 say?

Answer 4

Provides that the person liable for any tax charged under these provisions is the person receiving or entitled to the profits.

Question 5

What does the case of Edwards v Bairstow and Harrison (1956) tell us?

Answer 5

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.’

Question 6

What factors do we consider with the question ‘trade or no trade?’

Answer 6

The ‘badges of trade’ graphically described by the 1954 Royal Commission on Taxation.

Question 7

What is the 1st badge of trade?

Answer 7

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.

Question 8

What happened in Rutledge v IRC (1929)?

Answer 8

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.

Question 9

What is the 2nd badge of trade?

Answer 9

The length of ownership. A quick resale points towards trading.

Question 10

What is the 3rd badge of trade?

Answer 10

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.

Question 11

What happened in Pickford v Quirke (1927)?

Answer 11

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.

Question 12

What is the 4th badge of trade?

Answer 12

Supplementary work in connection with the realised property.

Question 13

What happened in Martin v Lowry (1927)?

Answer 13

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.

Question 14

What happened in CIR v Livingston (1927)?

Answer 14

Three individuals bought a cargo steamer, converted it, and sold it at a profit. The Court of Session held that this was a trade.

Question 15

What is the 5th badge of trade?

Answer 15

Why the trade took place. There may be some explanation as to why something is sold which negatives the idea of trading.

Question 16

What happened in West v Phillips (1958)?

Answer 16

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.

Question 17

What is the 6th badge of trade?

Answer 17

Motive. The absence of an intention to make a profit points against trading.

Question 18

What does ITTOIA 2005 s.9 say?

Answer 18

“All farming and market gardening in the UK shall be treated as carrying on a trade…”

Question 19

What did CIR v Maxse (1919) say?

Answer 19

The hallmark of a ‘profession’ is the use of intellectual skill, with or without manual skills.

Question 20

How is a ‘vocation’ regarded under the trading rules?

Answer 20

‘Vocation’ is a calling, the way in which someone spends his life.

Question 21

What is the significance of the case of Partridge v Mallandane (1886)?

Answer 21

The leading case of what is considered a vocation under the trading rules.

Question 22

What will courts nowadays more readily accept?

Answer 22

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.

Question 23

What did Sir Thomas Bingham MR say in Gallagher v Jones (1933)?

Answer 23

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.

Question 24

What does ITTOIA 2005 s.25(1) say?

Answer 24

‘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.’

Question 25

What changes in FA 2013 bring about?

Answer 25

Certain individuals carrying on a small business may choose to be taxed on a cash basis: ITTOIA 2005 s.25A

Question 26

What is the first question to ask about any receipt?

Answer 26

Is it a trading receipt or a capital receipt?

Question 27

What happened in Van den Berghs Ltd v Clark (1935)?

Answer 27

It was held that the £450,000 paid by the Dutch company to the English company for the termination of an agreement between the two was found to a capital receipt and hence not taxable.

Lord Macmillan said that ‘…the cancelled agreements related to the whole structure of the appellant’s profit-making apparatus.’

Question 28

What happened in Kelsall Parsons & Co v IRC (1938)?

Answer 28

The appellants were manufacturer’s agents; they had contracts with several manufacturers. One of them wished to terminate its agency contract and, because this occurred 16 months before it was due to expire, they paid Kelsall £1,500 as compensation.

It sum was held to be an income receipt and hence taxable. The loss of one agency did not represent the whole structure of the appellant’s profit-making apparatus.

Question 29

What happened in London and Thames Haven Oil Wharves Ltd v Attwoll (1967)?

Answer 29

Owners of a tanker which damaged a jetty owned by the taxpayer company paid a sum of money to them of which part was for some of the consequential damage, namely the loss of use of it. The Court of Appeal held that this sum was taxable as an income receipt.

Question 30

What did Diplock LJ say in London and Thames Haven v Attwoll (1967)?

Answer 30

Two questions have to be asked: (1) Was the compensation paid for the failure of the trader to receive a sum of money? If yes: (2) Would it have been an income receipt of the trade (and not a capital receipt)? If the answer to that is yes, then the compensation is taxable.

So, in that case the answer to (1) was yes and (2) this sum of money represented the profit which would have followed if the jetty could have been used.

Question 31

What happened in Simpson v John Reynolds & Co Ltd (1954)?

Answer 31

There was a payment of £5,000 by clients of the insurance brokers following the discontinuance of use by the clients of the broker’s services following a change in the control of the clients.

The payment was unsolicited and was not tied to possible future sales. The payment could not relate to future payment.

Question 32

What happened in Rolfe v Nagel (1982)?

Answer 32

Concerned voluntary payments to a diamond broker. It was held that here the sums were compensation for otherwise unremunerated work and were not unsolicited, and were trading receipts.

Question 33

What did IRC v Cock, Russell & Co Ltd (1949)?

Answer 33

The court gave its approval to the accountancy practice of permitting a trader to value stock at its cost price or its market price, whichever is the lower, and to treat each item of stock separately.

Question 34

What happened in Glenboig Union Fireclay Co Ltd v IRC (1922)?

Answer 34

The appellants received compensation from the Caledonian Railway Company for the exercise of the statutory power of the railway company to require the appellants not to ‘work’ particular deposits of fireclay underneath the railway line. HoL held that the compensation was a capital receipt in return for the sterilisation of the asset.

Question 35

What did Lord Wrenbury say in the case of Glenboig (1922)?

Answer 35

‘The whole point is that he is not to make a profit and is paid for abstaining from seeking to make a profit…It was the price paid for sterilising the asset from which otherwise profit might have been obtained.’

Question 36

What was stated by Lord Brightman in the case of Mallalieu v Drummond (1983)? (5)

Answer 36

(1) Case concerns whether any person carrying on a trade, profession or vocation on his own account is entitled to a deduction if he chooses to set apart clothes for use only at his place of work.
(2) Word ‘exclusively’ preclude a deduction if it appears to serve some other purposes.
(3) To ascertain whether the money was expended to serve the purposes of the taxpayer’s business, it is necessary to discover the taxpayer’s ‘object’ in making the expenditure. Commissioners have to look into the taxpayer’s mind at the time of purchase.
(4) An expenditure may be made exclusively to serve the purposes of business, but it may have a private advantage. This does not necessarily preclude the exclusivity of the business purposes.
(5) The taxpayer may have only have thought of the requirements of her profession when she bought her wardrobe. But one object, though not conscious, was the provision of clothing she needed as a human being.

Question 37

What happened in McKnight v Sheppard (1999)?

Answer 37

The taxpayer, a stockbroker, sought to deduct the cost of legal expenses incurred in defending himself before the disciplinary committee of the Stock Exchange.

The House of Lords held that such expenses were wholly and exclusively expended for the purposes of his trade.

Question 38

What happened in Sharkey v Wernher (1956)?

Answer 38

Lady Zia transferred 5 horses from her stud farm to her racing stables. The Inland Revenue contended that, on transfer, the horses’ market value should be entered in the accounts, and the House of Lords upheld this argument.

Question 39

What did Viscount Simonds say in Sharkey (1956)?

Answer 39

(1) The problem is whether a person, carrying on a trade, who disposes of part of his stock-in-trade not by way of sale but for his own use, must bring into his trading account the market value of that stock at the time of disposition.
(2) The taxpayer must be regarded as having traded with himself.
(3) The only logical way to treat the transfer is to regard it as having been disposed of by way of trade. Hence the sum should be what would normally have been received for it in the due course of trade: the market value.

Question 40

What did Mason v Innes (1967) say?

Answer 40

The rule in Sharkey v Wernher did not apply to a person carrying on a profession.

Here, a writer transferred the copyright and all other rights of his novel to his father ‘in consideration of natural love and affection’ which would otherwise be worth over £15,000.

Lord Denning argued that the rule in Sharkey applying to traders should not be extended to professional men. Should the artist who paints a picture and gives it to his mother pay tax on the value of it?

Question 41

What happened in the case of Newsom v Robertson (1953)?

Answer 41

A barrister who had chambers in Lincoln’s Inn was held not entitled to deduct the expenses of travelling between his chambers and home, this was despite the fact at his home was a library of law books and worked at home in the evenings and weekends.

Question 42

What happened in Horton v Young (1972)?

Answer 42

Self-employed bricklayer was held entitled to deduct the expenses of travelling from his home to the various sites of which he worked.

This was distinguished from Newsom’s case because Mr Horton kept at his home his tools and account books and made his contracts there. It was held that his home was his base, whereas Mr Newsom’s was his chambers.