Sometimes it is evident that a trade is being undertaken — a plumbing business, a manufacturing business, an accountant or solicitor are all ‘trades’. However, not all trading activities are easily identifiable. If you buy and sell a property in relatively quick succession for example, is that a trade in HMRC’s eyes or investment? Each source of income is taxed differently so the distinction is important. Generally, profits made from the sale of land and buildings are taxable under the capital gains tax (CGT) rules which, in most circumstances, results in a lower tax bill than profits charged to income tax.
There is a definition of ‘trade’ to be found in both the Income Tax Act 2007 and the Corporation Tax Act 2010 but it is far from being clear stating that a trade is ‘any venture in the nature of trade’. It has therefore been left to case law to delve deeper into the meaning. Using the various cases that have come before the courts in the last 20 years HMRC have compiled what are termed ‘badges of trade’.
At present HMRC lists nine ‘badges of trade’ being:
- a profit seeking motive;
- the number of transactions;
- the nature of the asset;
- existence of similar trading transactions or interests;
- changes to the asset;
- the way the sale was carried out;
- the source of finance;
- interval of time between purchase and sale;
- method of acquisition.
If any of the ‘badges’ are present in a transaction then HMRC may argue that any ‘profit’ is taxable as income, and while the existence of one badge can be enough to confirm an activity as trading, this need not necessarily be the case.
From the decided court cases that have been held, it is clear that no one ‘badge’ is more persuasive than another. Neither do all ‘badges’ have to be present. It is possible for more than one badge of trade to apply without an activity counting as trading. For example, it is clear that having an intention to make a profit can indicate a trading activity, however by itself this is not enough. In the 1979 case of Salt v Chamberlain 53TC143, a research consultant made an overall loss on the Stock Exchange after trying to forecast the market. The loss was made over several years and over 200 transactions. The court decided that this was not a trade as share trading by a private individual can never be subject to any of the badges of trade. Therefore the transactions were subject to CGT.
One recent court case where many of the ‘badges’ were considered was Mark Campbell v HMRC 2022 TC08398. In this case the court concluded that the purchase, modification and sale of four properties in five years was not trading and was therefore subject to CGT rather than income tax. HMRC brought the case because they had information that Mr Campbell had acquired and disposed of four properties between 2010 and 2015 selling each one for more than he paid. The court decided that, while they agreed that profits had been generated from the activities, on balance, the activities were not trading. The decision was made by considering the following factors relating to ‘badges of trade’:
- The length of ownership of the properties was short.
- The properties had been modified prior to sale.
- There was a repeated pattern of renovation.
- There was no connection with an existing trade or activity over a protracted period of time.
- The Appellant was not a professional property developer.
The court gave credence that Mr Campbell was employed full time in work unrelated to property development and had not been engaged in such activities elsewhere.
This case shows that no single ‘badge’ is conclusive evidence in itself. It is therefore necessary to critically examine the overall picture, distinguishing any unique features.
Partner Note: BIM20000 HMRC Business income manual; S989 ITA 2007); S1119 CTA2010; Salt v Chamberlain 1979 53TC143; Mark Campbell v HMRC 2022 TC08398