Can I be taxed on this trade?

“A single one-off transaction can be an adventure in the nature of trade. Beyond that, I have found it impossible to find any single statement of law which is applicable to all the cases in circumstances”, said Sir Nicolas Browne in 1986. This quote adequately summarises the challenges in determining if a transaction can be a venture in the nature of trade. In 1955, the Royal Commission on the Taxation of Profits and Income identified six badges of trade. Now, HMRC lists nine badges for the same – 

  1. Profit Seeking Motive 
  2. The Number of Transactions
  3. The nature of assets 
  4. Existence of similar trading transactions or interests 
  5. Changes to the asset
  6. The way the sale was carried out
  7. The source of finance 
  8. Interval of time between purchase and sale 
  9. Method of acquisition

However, the presence of these badges alone isn’t sufficient to establish trade. To define if a transaction is the nature of trade, these badges are applied depending on the specific situation within a case. This essay will explore how case law within the UK shapes the applicability of badges of trade to determine if a transaction is an adventure in the nature of trade. Here, we will take trade to include any trade, manufacturer or concern in the nature of trade. 

The intent behind the transaction is of utmost importance when determining if it is one of trade. If an asset is acquired to make a profit, it indicates trading activity. However, this alone is not enough, as is evident in the case Salt v Chamberlain, where share trading for profit motive was taken to be capital gains and not trade. Similarly, in Degorce v Commissioners, a distinction was established between the commerciality of a person investing and the commerciality of a trade undertaken. However, depending on the circumstances, if an asset was purchased not with a profit motive, it can still be an adventure in the nature of trade. In Taylor v Good, a house was purchased from the market for inhabitation. However, the wife disapproved of the building. Therefore, the couple built residential properties on the site and accepted an offer. The court held that even though the initial intent was not for profit, it qualified as trade because the house was acquired from the market and an intent for profit was realised later. 

The above examples are of one-off transactions but the number of transactions poses another crucial step in amounting a transaction to trading activity. A single transaction can be considered an adventure in the nature of trade ( CIR V Livingston and Others). However, it is more signifying if there is a repetitive pattern. Such is evident in Pickford v Quirke, where the repetition of selling mills made it an adventure in the nature of trade. What also helps in identifying trade is if the transaction followed the operations which are commonly followed in that line of business. In CIR v Livingston, three individuals caught a cargo vessel, repaired it and then sold it at a profit. Even if the transaction was one-off, they followed the traditional methods of carrying out trade within this business and hence it was held that the transaction qualified as trade.

The nature of the asset itself also causes complications when determining if the asset was bought for trade. Examples of such assets include personal assets and investment which has the potential to generate income. A landmark case which elaborates further upon this is Marson v Morton. Here, the land was purchased as an investment and then later sold. As the transaction was not related to his normal trade as a potato merchant, the one-time transaction was not considered to be a trade. Here, the transaction included some of the badges of trade, moreover, more was needed to be deemed as trade. On the other hand, in Wisom v Chamberlain, the profit after buying silver bullion to counter devaluation was considered to be a trade. The case also brings forth the significance of the source of finance and the interval of time. The silver was brought with a partial loan which implicates the need for the sale of the asset to repay the debt in a short period. This shows that the badges of trade are moulded to apply to the specific nature of the case. No one badge can determine if the transaction is in the nature of trade. This is highlighted by HMRC as well. It states that the weightage of each badge upon a case depends on the circumstances of the case.

It is important to note that the badges are not the sole determinant for the presence or absence of trade. In Eclipse 35 v Commissioners, their activity was found to be a mere device to gain fiscal activity. This decision was made not based on the badges of trade but due to the definition of trade itself which stipulates that the trade should be bilateral (Ransom v Higgs). Here, they concluded that no meaningful commercial good or service was offered to Disney by Eclipse 35, thus concluding that the transaction was not a trade. Here, many badges of trade were present but it is evident that case law shapes the use of the badges. 

As can be concluded, there is no one law which can define if a transaction is a venture in the nature of trade. It is case law which constructs and gives meaning to the phrase. The badges are there for direction, but their weightage in every instance is dependent on the unique circumstances of the particular case. 

Bibliography

  • Loutzenhiser, Glen, and John Tiley. Tiley’s Revenue Law. 10th edition. Oxford ; New York: Hart, 2022.

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