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Trading income is taxed for both income tax and corporation tax purposes. In order for a tax charge to arise under the trading income rules, there must be a trade. So what constitutes trading? And, when does a trade commence or cease?
Indicators of trade
To determine whether a trade exists, historically the courts have looked for the presence of absence of certain key defining features. In 1955, the Royal Commission of Profits and Income Tax reviewed existing case law and identified six ‘badges of trade’. The concept has evolved over time, and the following indicators can be used to provide an overall impression as to whether a trade exists.
Badge | Interpretation |
Profit-seeking motive | An intention to make a profit suggest trading, but isn't conclusive |
The number of transactions | Systematic and repeated transactions suggest a 'trade' |
Existence of similar trading transactions or interests | If there is an existing trade, the similarity of a new transaction may suggest trading |
Change to assets | Repairs, modifications or improvements to make an asset or assets more easily saleable or saleable at a higher price may suggest trading |
The way in which the sale was carried out | A sale in a way typical of trading organisations suggests trading whereas a sale to raise emergency cash is probably not trading |
The source of finance | e.g. where money was borrowed to buy and asset and the debt can only be repaid by selling it on |
Interval between sale and purchase | When trading, assets will normally be sold on quickly |
Method of acquisition | Assets that are inherited or acquired as a gift are less likely to be the subject of a trade. |
Overall impression
It is important to note that there is no single ‘badge’ that provides conclusive proof of a trade – rather, it is a question of looking at the characteristics of trading and the extent to which they are present or absent to form an overall impression of whether there is a trade. The weight attached to each ‘badge’ will vary depending on the particular circumstances and the type of business.
The information contained within in this article is provided for informational purposes only and is not intended to substitute for obtaining accounting, tax, or financial advice specific to your own circumstances from your own adviser.
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