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A side by side comparison of badges of trade between circumstances pointing to trade or investment.

HMRC and taxation sources on the interpretation of badges of trade are many and extensive. With a view to summarising them and providing a quick reference concerning the most frequently considered badges of trade, we have prepared a side by side comparison between circumstances pointing to trade or investment.

Badges of trade tests should be considered in their entirety and meeting one test without considering others is not conclusive.

You can read more about badges of trade on our website.

Trade Investment
Intention to make a profit
  • Acquisition of investment was to realise a profit and that intention is based on facts rather than professed declaration
  • There is a commercial motive of the activities undertaken, irrespectively of whether profit or loss ultimately arises
  • Profit making is not a conclusive pointer and other badges of trade have to be present to determine that it is trade
  • Speculation does not count as intention

 

  • Acquisition may or may not have been made with a view to realise profit but there are no or hardly any other sufficiently significant badges of trade to suggest that it is trade
  • Acquisition of shares was speculative whereby a risk that the transaction(s) may not be as profitable as expected (or may indeed give rise to a loss) was recognised and the project nevertheless pursued
  • Profit making motive was not the main motive
  • The sole motive of trade was fiscal– to get a tax advantage (generate a loss in order to offset against profits and avoid tax) Overseas Containers (Finance) Ltd v Stoker [1989] 61TC473 page 536C. There was no other commercial purpose
Number of transactions

Generally multiple, frequent transactions are likely to indicate trade, whilst isolated transactions are likely to be investment. However, it is possible that this broad rule will not be conclusive. The nature of profit generated (capital or income nature) needs to be considered in this instance.

  • Many systematically repeated transactions at high frequency showing a continuous activity
  • Single transaction undertaken as adventure in trade, including speculative adventure which generates an unexpected profit which is of income, not capital nature. For example, a one off purchase of a commodity, at a volume which is in excess of what one would need for personal purposes, and re-sale of this large quantity of commodity. CIR v Fraser [1942] 24TC498
  • Scarce number of transactions, where the motive to set up a trade was not at first present but formed later (by the time subsequent transactions arose). In this instance later transactions are taken into account in assessing the nature of the first.

For example in Leach v Pogson [1962] 40TC585 an individual set up a driving school which was later sold. By the time the driving school was sold an intention had arisen to develop a trade of setting up and selling driving schools.

  • A single or scarce number of transactions, including those which were undertaken as a speculative adventure which generated a profit of capital nature
  • Repeated but irregular transactions in different types of property spread over several years

 

Nature of asset and how it generates income
  • Typical trading commodity
  • Assets which do not produce income until they are sold point towards trade

 

  • Financial asset – Generally assets which produce income (dividends on shares)
  • Assets which produce no income as they are designed so that no or little yield is generated during their life and the major part of the income is realised on sale (bonds, some stocks)
Is the asset for personal enjoyment?  
  • Asset is not used for enjoyment and of no use to the owner unless sold
  • Wisdom v Chamberlain [1968] 45TC92
  • Asset used for enjoyment (pride of possession) – there is a presumption that there is no trade even if acquired in the hope or expectation of value appreciation, unless there are clear indications that it was acquired in order to carry on a trade
Quantity purchased
  • High quantity purchased indicative of trade for a profit (see: Number of transactions above)
  • CIR v Fraser [1942] 24TC498
  • Low quantity indicative of personal use
Connection with existing trade
  • Transaction is similar to those already undertaken
  • Transaction undertaken by someone and is similar or related to his existing trade
  • Purchase and sale of asset which is unrelated and dissimilar to any activity undertaken to date
 
Organisation of operations and sale transaction
  • Transaction, even a one off, is carried out in the same manner as it would be carried out by ordinary traders
  • There is absence of any typical of trading activity such as establishing a sales office, employing people, advertising
Link to the purpose for which the entity was formed
  • Transaction is related to the purpose for which the organisation was formed
  • Activity is incidental or unrelated to the purpose for which the venture was started
Interval of time between purchase and sale
  • Sale takes place soon after purchase, even if there is no admitted or demonstrable intention
  • There was an intention to sell quickly
  • Asset was contracted to be sold before it was acquired
  • There was an intention to hold the asset for a long term investment, even if it was actually sold soon after purchase due to changing circumstances
Way and purpose of the acquisition of the asset
  • Asset is obtained as a gift or inherited but it can be demonstrated that it became an item of stock (intention to trade was formed later and circumstances point to it)
  • Work was done to the asset in order to enable it being sold
  • Asset is gifted or inherited and is not resold as part of a trade

Article from ACCA In Practice