Tax “Badges of Trade”
The Income Tax (Trading and Other Income) Act 2005 states that the trading profit of a person who is resident in the UK are chargeable to income tax whether the trade is carried on. The trading profits of a non UK resident are chargeable to income tax only if the trade is carried on wholly or partly in the UK. When deciding if someone is trading or not it’s important to make two distinctions:
(a) The distinction between employment and self-employment
(b) For a taxpayer who sells goods or other assets, the distinction is between trading activities and non-trading activities.
Section 989 of the Income tax states that a “Trade” includes “any venture in the nature of trade”. This circular definition is f little real help and therefore it has been left largely to the courts to decide whether or not a given activity constitutes trading.
The way to distinguish is through the “badges of trade”, they are as follows:
(a) Subject matter of transaction
If a taxpayer sells assets of a type which might normally be acquitted for personal enjoyment or held as a source of income, this may suggest that any profit arising on their sale should be treated as a capital gain rather than a trading profit. But if the assets concerned do not provide personal enjoyment and do not yield income, it would seem that the only way in which they could be turned to advantage is by selling them. In these circumstances, any profit arising on their sale might be treated as a trading profit. In Mary v Lowry 1926 the tax payer bought and sold a huge quantity of ware surplus lien. In Rutledge v CIR 1929 the taxpayer bought and sold one million toilet rolls. In both cases, it was held that the subject matter of the transaction was such that activity could be construed as trading.
(b) Length of the period of ownership
Trading stocks are normally retained for only a short period before being sold, whereas assets acquired for personal use or as a source of income are generally retained for longer. Therefore, if assets are bought and sold within a short space, of time it is more likely that any profit made will be treated as trading profit.