Badges of Trade

Note:

 Content been Summarised from sources:-

 [http://www.hmrc.gov.uk/manuals/bimmanual/bim20205.htm]

Case summary:

[http://www.acca.co.uk/uk/members/technical/advice_support/tax/cases/income/]

There is few indicators or so call circumstances we might take considered to judge whether an activities could be considered as "business" under Section 4(a) by badges of trade :-

1) Profit seeking motive

• An intention to make a profit supports trading, but by itself is not conclusive.
• Evidence that the sole object of acquiring an asset was to re-sell it at a profit, without any intention of holding it as an investment, is a pointer to the conclusion that a trade is being carried on. However, the presence of a profit-seeking motive is not necessarily a decisive pointer to the existence of a trade. It is only one factor to be weighed along with all the other relevant factors.


Cases reference:-

i. Salt v Chamberlain Ch D 1979 53 TC 143 [1979] STC 750

A research consultant made a loss on the Stock Exchange after trying to forecast the market.  The loss was made after several years and over 200 transactions.  This was not seen as a trade and capital in nature.  It was concluded that share trading by a private individual can never have the badges of trade pinned to them.  These transactions are subject to Capital Gains Tax.

ii. Rutledge v CIR CS 1929 14 TC 490

On a business trip to Germany a taxpayer purchased one million toilet rolls.  On returning to the UK the sole consignment of toilet rolls were sold to one individual for a profit.  The profit made on this large quantity single purchase and resale item was ‘an adventure in the nature of trade’.  The case was decided on the fact that the purchase was not made for own use or investment purposes.

Further reading source: -  BIM20210



2) Isolated transactions
• Verifying with the number of transactions
• Systematic and repeated transactions will support 'trade'.
• A single isolated transaction can amount to the carrying on of a trade for tax purposes, but it is generally not easy to show that that is the case. The transaction, if it is to be trading for CT purposes, has to be an adventure or concern in the nature of trade (ICTA88/S832 (1) for Corporation Tax or for Income Tax, a venture in the nature of trade (ITA/S989)

Cases reference:-

i)  IRC v Fraser 1942 24 TC 498

In IRC v Fraser 1942 24 TC 498, an isolated transaction in the purchase and re-sale of whisky in bond was held to be an adventure in the nature of trade. The nature of the commodity and quantity purchased was such that it could not reasonably be considered to be for own consumption, and there was insufficient evidence to indicate an investment motive.

Sources from: [http://www.taxationweb.co.uk/tax-articles/business-tax/the-badges-of-trade.html]

ii) Marson v Morton and Others [1986] 59TC381 

Some land was purchased with the intension to hold it as an investment.  No income was generated by the land, however, it did have planning permission.  The land was sold latter following an unsolicited offer.  As the transaction was far removed from the taxpayers normal activity (potato merchant) and was similar to an investment, it was not a trading profit.  The transaction was not an adventure in the nature of a trade.

Further reading source: -  BIM20230



3) Nature of the asset
• Is the asset of such a type or amount that it can only be turned to advantage by a sale? Or did it yield an income or give 'pride of possession', for example, a picture for personal enjoyment?
• The nature of the asset can be of great, even decisive, importance. Some assets are generally realised by way of trade (for example chemicals) and for transactions in such assets the existence of a trade is rarely in doubt.
• The area of difficulty concerns assets that are generally bought:

-    as an investment that usually, but not necessarily, yields income, for example shares, or

-    for personal use or enjoyment, for example, paintings and classic cars, or

-    as a fixed asset of an admitted trade, for example, plant and machinery.

Their very nature provides an initial presumption that these types of assets are acquired other than as a subject of trade.

Cases reference:-

i) IRC v Fraser 1942 24 TC 498 

See the comments of the Lord President in CIR v Fraser [1942] 24TC498. That presumption can be overturned, but there is, in practice, a greater onus on those who assert that there is a trade, than is the case with assets that are commonly dealt with by way of trade.

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In IRC v Fraser 1942 24 TC 498, an isolated transaction in the purchase and re-sale of whisky in bond was held to be an adventure in the nature of trade. The nature of the commodity and quantity purchased was such that it could not reasonably be considered to be for own consumption, and there was insufficient evidence to indicate an investment motive.
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Further reading source: -  BIM20245



4)  Connection with existing trade
• Transactions that are similar to those of an existing trade may themselves be trading.
• If there is an existing trade, then a similarity to the transaction under consideration may be a pointer to that transaction having a trading character.


Cases reference:-

i)  Harvey v Caulcott [1952] 33TC159 

a builder claimed that certain properties that he had built and then sold many years later were investments and not part of his trading stock. On the facts of his case he succeeded but the court commented:
“Such a case as the present is always coloured by the fact that the man is a builder. That no doubt puts a peculiar onus on him, to show that the profit from the sale of some property is profit from an investment, or profit from something which is not trading stock. That onus is not incapable of discharge”.'
The courts in other cases have also considered possible connections with a person's main trade.

ii) In CIR v Fraser [1942] 24TC498 the court commented:

“It is in general more easy to hold that a single transaction entered into by an individual in the line of his own trade (although not part and parcel of his ordinary business) is an adventure in the nature of trade than to hold that a transaction entered into by an individual outside the line of his own trade or occupation is an adventure in the nature of trade”.'

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In IRC v Fraser 1942 24 TC 498, an isolated transaction in the purchase and re-sale of whisky in bond was held to be an adventure in the nature of trade. The nature of the commodity and quantity purchased was such that it could not reasonably be considered to be for own consumption, and there was insufficient evidence to indicate an investment motive.
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iii) Marson v Morton and Others [1986] 59TC381 
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Some land was purchased with the intension to hold it as an investment.  No income was generated by the land, however, it did have planning permission.  The land was sold latter following an unsolicited offer.  As the transaction was far removed from the taxpayers normal activity (potato merchant) and was similar to an investment, it was not a trading profit.  The transaction was not an adventure in the nature of a trade.
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Further reading source: -  BIM20270

5) Modification of the asset

• Changes to the asset
• Was the asset repaired, modified or improved to make it more easily saleable or saleable at a greater profit?
• What happens to the asset pending resale may be a relevant factor. There may be modifications to the asset by way of processing or manufacture, or some kind of adaptation to make it more readily marketable. All these actions are typical of trading activities.

Cases reference:-

i)  CIR v Livingston and Others [1926] 11TC538 

a sea vessel was purchased as a joint venture by three individuals. The Lord President stated:
“The Respondents began by getting together a capital stock sufficient (1) to buy a second-hand vessel, and (2) to convert her into a marketable drifter. They bought the vessel and caused it to be converted at their expense with that object in view, and they successfully put her on the market. From beginning to end, these operations seem to me to be the same as those which characterise the trade of converting and refitting second-hand articles for sale… The profit made by the venture arose, not from the mere appreciation of the capital value of an isolated purchase for resale, but from the expenditure on the subject purchased of money laid out upon it for the purpose of making it marketable at a profit. That seems to me of the very essence of trade”.'


5.1 Breaking down of assets into smaller lots

ii)   Cape Brandy Syndicate v CIR [1921] 12TC358 - 
Members of a wine syndicate joined in a separate syndicate to purchase brandy from South Africa.  Some was shipped to the East with the remainder being sent to London to be blended with French Brandy, re-cask it and sell it in numerous lots was all part of the evidence on which the Commissioners were entitled to find that a trade was carried on.  The taxpayer tried to argue that the transaction was of a capital nature from the sale of an investment.  It was held that a trade or business was carried on and was assessable as a trading profit.

5.2 Expenditure on an asset after purchase and before sale

Expenditure on an asset after purchase and before sale is not always strong evidence of a trading motive. You must have regard to the nature and scale of the expenditure.

For example, insurance against loss, normal maintenance to prevent deterioration, or the cost of repairing some fault, which prevents the asset carrying out its normal function, may have little or no relevance when considering a question of trading. This sort of expenditure is the type that any owner would incur. They are not coloured with a strong trading character.

5.3 No modifications to the asset

If an asset does not need any modification or other work, then absence of any modification etc is neutral.

Further reading source: -  BIM20275

6) Organization of the activity

• Was the asset sold in a way that was typical of trading organisations? Alternatively, did it have to be sold to raise cash for an emergency?
• It is a pointer towards trade that the transactions are carried out in the same manner as those of an undisputed trader.

Cases reference:-

i)  CIR v Livingston and Others [1926] 11TC538 

Lord Clyde stated:
“I think the test, which must be used to determine whether a venture such as we are now considering is, or is not, ”in the nature of “trade”, is whether the operations involved in it are of the same kind, and carried on in the same way, as those which are characteristic of ordinary trading in the line of business in which the venture was made”.'

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a sea vessel was purchased as a joint venture by three individuals. The Lord President stated:
“The Respondents began by getting together a capital stock sufficient (1) to buy a second-hand vessel, and (2) to convert her into a marketable drifter. They bought the vessel and caused it to be converted at their expense with that object in view, and they successfully put her on the market. From beginning to end, these operations seem to me to be the same as those which characterise the trade of converting and refitting second-hand articles for sale… The profit made by the venture arose, not from the mere appreciation of the capital value of an isolated purchase for resale, but from the expenditure on the subject purchased of money laid out upon it for the purpose of making it marketable at a profit. That seems to me of the very essence of trade”.'
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ii)  CIR v Fraser [1942] 24TC498

the fact that the whisky was sold in exactly the same way as would be adopted in the course of an ordinary trade in that commodity was an important pointer in favour of a finding that Fraser was trading.

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In IRC v Fraser 1942 24 TC 498, an isolated transaction in the purchase and re-sale of whisky in bond was held to be an adventure in the nature of trade. The nature of the commodity and quantity purchased was such that it could not reasonably be considered to be for own consumption, and there was insufficient evidence to indicate an investment motive.
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Further reading source: - BIM20280




7) Method of finance
• Was money borrowed to buy the asset? Could the funds only be repaid by selling the asset?
• The method of financing should be examined. The purchaser of an asset may have to borrow money in circumstances that indicate that, from the first, he has to sell the asset to repay the loan. That is, the purchase is undertaken in the expectation that the asset will be paid for out of the proceeds of the sale.

Cases reference:-

i)  Wisdom v Chamberlain CA 1968 45 TC 92 [1969] 1 WLR 275 [1969] 1 All ER 332

A taxpayer purchased two large quantities of silver bullion to counter the effects of the devaluation of the pound.  His normal occupation was not in that sort of activity. The purchase of the bullion was financed by loans at a high rate of interest in circumstances that made it clear that it was necessary to sell the asset in the short term, to repay the loan and eliminate the interest obligation.  As the purchase was done on a short term basis in order to realize profit.  There was an adventure in the nature of trade and was therefore assessed as trading profit.

Further reading source: - BIM20300



8) Interval of time between purchase and sale
• Assets that are the subject of trade will normally, but not always, be sold quickly. Therefore, an intention to resell an asset shortly after purchase will support trading. However, an asset, which is to be held indefinitely, is much less likely to be a subject of trade.
• The interval of time between purchase and sale may be important. A person who buys an asset and holds it for many years before disposing of it may be in a stronger position to argue that this is the realisation of an investment, than if the sale follows very soon after purchase. Similarly if you can show an intention, at the time of purchase, to sell quickly, that supports the idea of trading because trading implies the idea of turning over assets for profit.

Cases reference:-

i)  Wisdom v Chamberlain CA 1968 45 TC 92 [1969] 1 WLR 275 [1969] 1 All ER 332

-He sold the ingots within a year and made a profit in such transaction.

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A taxpayer purchased two large quantities of silver bullion to counter the effects of the devaluation of the pound.  His normal occupation was not in that sort of activity. The purchase of the bullion was financed by loans at a high rate of interest in circumstances that made it clear that it was necessary to sell the asset in the short term, to repay the loan and eliminate the interest obligation.  As the purchase was done on a short term basis in order to realize profit.  There was an adventure in the nature of trade and was therefore assessed as trading profit.
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ii)   Marson v Morton and Others [1986] 59TC381, 

The vice chancellor said, when discussing the badges of trade:
“What were the purchasers’ intentions as to resale at the time of purchase? If there was an intention to hold the object indefinitely, albeit with an intention to make a capital profit at the end of the day, that is a pointer towards a pure investment as opposed to a trading deal. On the other hand, if before the contract of purchase is made a contract for resale is already in place, that is a very strong pointer towards a trading deal rather than an investment. Similarly, an intention to resell in the short term rather than the long term is some indication against concluding that the transaction was by way of investment rather than by way of a deal”.'

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Some land was purchased with the intension to hold it as an investment.  No income was generated by the land, however, it did have planning permission.  The land was sold latter following an unsolicited offer.  As the transaction was far removed from the taxpayers normal activity (potato merchant) and was similar to an investment, it was not a trading profit.  The transaction was not an adventure in the nature of a trade.
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Further reading source: - BIM20310

9)  Supervening trading

• An asset that is acquired by inheritance, or as a gift, is less likely to be the subject of trade
• The point is considered specifically in relation to land.
• The way in which an asset was acquired must be considered. If it is by gift or inheritance it will be difficult, although not impossible, to show that a subsequent sale is by way of trade.

If the asset were acquired by purchase the circumstance, for example the market in which it was bought or the correspondence leading up to purchase, may tend to show either that it was being bought for resale or that it was wanted for private use or as an investment.

If an asset acquired as a capital asset, for example by gift or inheritance, is later sold at a profit you can only succeed in taxing that profit under Case I if you can show that, at some point before sale, the asset became trading stock of a trade. This is the concept of supervening trading.

Cases reference:-

i) Taylor v Good CA 1974 49 TC 277 [1974] STC 148 [1974] 1 WLR 556 [1974] 1 All ER 1137

 The taxpayer carried on two retail businesses and lived with his wife, who assisted him in his businesses, in a two-bedroom council flat over one of the shops. The taxpayer purchased at auction, a property with 17 rooms, and 9½ acres of land.

At the time of purchase, the property was in a bad state of repair and at the taxpayer had made no decision on what to do with the property what to do with it but had in mind possibly going to live there.

On inspecting the interior of the house his wife rejected that idea and the idea was abandoned. He subsequently applied for planning permission to develop the site by knocking-down the existing dwelling house and build 90 residential properties on the site.

He received offers from several developers for the site and subsequently accepted one of the offers. The Inland Revenue issued an assessment to income tax on the grounds that this was a venture in the nature of trade.

The Court of Appeal allowed the taxpayer’s appeal, holding that, on the facts found or conceded, there was no evidence of an adventure in the nature of trade and should, instead taxed as a capital gain.

Megarry J expressed the concept most clearly in Taylor v Good [1974] 49TC277:

“Even if the house was purchased with no thought of trading, I do not see why an intention to trade could not be formed later. What is bought or otherwise acquired (for example, under a will) with no thought of trading cannot thereby acquire an immunity so that, however filled with the desire and intention of trading the owner may later become, it can never be said that any transaction by him with the property constitutes trading. For the taxpayer a non-trading inception may be a valuable asset: but it is no palladium. The proposition that an initial intention not to trade may be displaced by a subsequent intention, in the course of the ownership of the property in question, is, I think, sufficiently established…”.

Further reading source: - BIM20315





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Further readings:-

http://www.malaysiaco.com/badges-of-trade/

http://www.taxationweb.co.uk/tax-articles/business-tax/the-badges-of-trade.html