The reason behind this article is that I realised there was very little guidance on the meaning of the word ‘trade’ for tax purposes other than the Taxes Act (S989 ITA 2007 and S1119 CTA) that states ‘trade’ includes any ‘venture in the nature of trade’.
In April 2017, HMRC introduced the ‘trading allowance’ allowing taxpayers to make small amounts of money from their hobby. Even where HMRC consider the activities of the hobby to form a ‘trade’, taxpayers can earn up to £1000 tax-free. But once again HMRC does not define what a ‘trade’ is.
The HMRC Business Income Manual states that ‘broadly a ‘trade’ can be taken to refer to operations of a commercial kind by which the trader provides to customers for reward some kind of goods or services’.
There is clearly very little statutory help – leaving the courts to provide guidance.
In 1955, a Royal Commission was created to analyse the volume of existing case law on the subject and to identify the ‘badges’ of trade.
Badges of trade
In most cases you would think that identifying a trade was obvious, but from my own experience this is often not the case. This is particularly relevant for a taxpayer where the transaction could be subject for instance to income tax at 40% under a trade or 18% as a capital gain.
The ‘badges’ of trade in my view should not be looked at individually but rather collectively and even then, should not see them as the definitive identifiers of a trade.
Subject matter – generally an asset purchased for investment will have an income yield or provide the purchaser with personal enjoyment by virtue of ownership. However, where an asset is bought in quantities for resale and then subsequently sold, a trading position (‘trade’) is established.
Supplementary work – where the asset purchased is subject to enhancement to make it more saleable, this is indication of a trading activity. A classic car purchased and enhanced by an individual and subsequently sold will be exempt from taxes. However, the continual acquisition and sale of classic cars would be deemed to be a trading activity.
Number and frequency of transactions – in general the longer the asset is held the more likely it is to be indicative of a capital investment. Regular purchases and sales within a short period of time would be indicative of a trading activity.
Circumstances of sale – assets may be sold on a regular basis simply to provide a source of funds and assets that are acquired for resale and, due to market conditions, are difficult to sell and are retained until such time they can be sold. Therefore, the circumstances and intention of the sale are important.
Motive – quite simply there must be a commercial motive for trading.
It should be noted that where the motive lying behind the transaction is to obtain a tax advantage this would not be a trading transaction.
I thought it would be interesting to summarise what the HMRC Business Manual states about the taxation of illegal activities: There is only a limited amount of guidance from the courts on the type of illegal activities that amount to a trade:
• Smuggling alcohol for sale is a trade (Lindsay, Woodward & Hiscox v CIR  18TC43).
• Operating illegal gaming machines is a trade (Mann v Nash  16TC523).
In addition, there are also a number of statements made in various court cases as follows:
• Drug dealing is a trade (Lord Sands in Lindsay, Woodward & Hiscox v CIR .
• Burglary or housebreaking is not a trade (Lord Denning, in J P Harrison (Watford) Ltd v Griffiths . 40TC281; Lord Sands in Lindsay, Woodward & Hiscox v CIR  and Finlay J in Southern v AB .
• Receiving stolen goods may be a trade (Denman J in Partridge v Mallandine ).
There is little supporting reasoning to these statements, the view being expressed as if it was self-evident.
The HMRC Business Manual continues: Pure crime (extortion or burglary) does not involve the commercial acquisition and provision of goods or services.
Selling controlled drugs and smuggling goods for sale (as opposed to personal consumption) may well involve the commercial acquisition and provision of goods or services.
From my experience, HMRC will review each individual case to decide whether to assess the illegal activity for tax.
Have your tax affairs in order pre-release
Remember to contact The Tax Academy CIC to review your tax affairs to ensure they are up-to-date. There is nothing worse than being released from prison and finding that you have tax penalties and tax debt that need to be resolved with HMRC.
Please contact Paul Retout from The Tax Academy CIC on 01824 704535 or write to him: The Tax Academy CIC, Unit 4 Ffordd Yr Onnen, Lon Parcwr Business Park, Ruthin, Denbighshire LL15 1NJ.