Trading income is taxed for both income tax and corporation tax purposes. In order for a tax charge to arise under the trading income rules, there must be a trade. It is therefore necessary to understand what constitutes trading, and when a trade commenced or ceased.
Indicators of trade
To determine whether a trade exists, historically the courts have looked for the presence of absence of certain key defining features. In 1955, the Royal Commission of Profits and Income Tax reviewed existing case law and identified six ‘badges of trade’. The concept has evolved over time, and the following indicators can be used to provide an overall impression as to whether a trade exists.
|Profit-seeking motive||An intention to make a profit supports trading, but by itself is not conclusive.|
|The number of transactions||Systematic and repeated transactions suggest a ‘trade’|
|Existence of similar trading transactions or interest||If there is an existing trade, the similarity of the transaction under consideration may suggest the presence of trading.|
|Change to the assets||Repairs, modifications or improvements to make the assets more easily saleable or saleable at a greater price may suggest trading|
|The way in which the sale was carried out||The sale of an asset in a way which is typical of trading organisations may suggest trading, whereas a sale to raise emergency cash is less likely to indicate trading|
|The source of finance||Where money has been borrowed to purchase the asset and the funds can only be repaid by selling the asset, this may suggest trading – money may be borrowed to facilitate the purchase of an asset at a profit|
|Interval between sale and purchase||Assets that are the subject of trade will normally be sold quickly; an intention to sell an asset shortly after purchase will support trading, whereas an asset that is held indefinitely is less likely to be the subject of a trade|
|Method of acquisition||Assets that are inherited or acquired as a gift are less likely to be the subject of a trade.|
It is important to note that there is no single ‘badge’ that provides conclusive proof of a trade – rather, it is a question of looking at the characteristics of trading and the extent to which they are present or absent to form an overall impression of whether there is a trade. The weight attached to each ‘badge’ will vary depending on the particular circumstances and the type of business.
Partner note: Mason v Morton and Others  59 TC 381; HMRC’s Business Income Manual BIM 20200ff.
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