Understanding the Self Employed Badges of Trade

The Badges of Trade

Each of these has been considered in turn below.  It should be noted that while individual rules may apply more to a particular transaction than others, that often the courts will consider a combination of rules before making a determination.

Where the badges of trade apply a transaction is treated as being “trade” in nature and where they do not apply a transaction is treated as being “capital” in nature.


Financial auditor analyzing company financial report


Financing arrangements

Where a taxpayer funds the purchase of an asset with short term funding such as a loan, and the asset must be sold to service the loan, then HMRC may argue that the asset was purchased with a view to short term sale and therefore is an indication of “trade”.

In contrast if the loan can be serviced and potentially repaid without selling the asset or is longer term in nature, then it is easier to argue that the transaction may be “capital” in nature.

Case: Wisdom v Chamberlain – The taxpayer bought silver bullion with a short-term loan, but he could not service the loan interest without selling the bullion.  Outcome: Trade


Repetition/frequency (number of similar transactions)

The more frequently a transaction occurs the more likely it is to be treated as “trade”, and vice versa.

Case: Pickford v Quirke – The taxpayer bought a milling machine, but instead of using it in the business decided to strip it down and sell the parts.  Due to the success of this venture he repeated this process more times.  Outcome: Trade


Organisation (existence of a sales organisation)

Where steps have been taken to actively market or sell a product then it is more likely it is to be treated as “trade”, and vice versa.

Case: The Cape Brandy Syndicate – A group of accountants distilled their own brandy.  As they had produced much more than they could consume themselves, they setup a phone line to sell the surplus, purchased brochures, and created adverts to market it.  Outcome: Trade


Gap (length of time between original ownership and sale)

Ownership of something for a short period of time is more likely it is to be treated as “trade”, and vice versa.


Similar trading activities (whether there is a connection with an existing trade)

Where the nature of a transaction is similar to business which is already being conducted then it is more likely it is to be treated as “trade”, and vice versa.  So a criminal lawyer who sells a building is unlikely to be treated as “trade”, whereas another lawyer who also performs conveyancing or other similar work would.


Profit-seeking motive

There has to be a profit seeking motive for trade to occur.  Therefore, where a profit has occurred it is important to be able to demonstrate an intention other than profit where this is possible.


Alterations/modifications to sell an asset

Where an asset has been bought and modified prior to sale for the purposes of making it more attractive to a buyer then this is more likely it is to be treated as “trade”, and vice versa.


Way the asset was acquired and the reason for sale

Where an asset has been purchased instead of being acquired by gift or inheritance then this is more likely it is to be treated as “trade”, and vice versa.


Nature of the asset

Where an asset has been bought for the purposes of resale then this is more likely it is to be treated as “trade”, and vice versa.

Case: Rutledge v CIR – – The taxpayer bought one million rolls of toilet paper in a single transaction, and then sole them at a profit in another single transaction.  Outcome: Trade as it could not be argued that they were purchased for another reason.


Land Transactions

Due to the high value of land transactions, these are frequently subject to scrutiny and challenge by HMRC.  In deciding whether the badges of trade apply, key questions to ask include:

  • Is the taxpayer investing or dealing in land?
  • Did the taxpayer reside or intend to reside in the property?
  • Was there an intention to make a profit on sale when the land was originally purchased?

It is therefore important when conducting land transactions to document your intentions at the outset!


Share Transactions

In the majority of cases this is an area where the badges of trade do not apply to private individuals.  Profits made from share dealing are generally accepted to be capital in nature, unless they are specifically “in the business” of selling shares / securities.

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