Trade Charge: explain trade & distinguish between trading income and capital gains when property
is bought and sold.
This essay will identify the term ‘trade’ for the purpose of income tax
and evaluate how can income be distinguished from capital gains. Vitally,
trading ventures are subjected to income tax under s.5 Income Tax (Trading
and Other Income) Act 2005 whereas investment gains on capital assets are
subjected to capital gains tax under s.1 Taxation of Chargeable Gains Act 1992.
Taxpayers will usually prefer categorising a profit as capital gain due to lower
tax rates and the exemptions.
‘Trade’ is defined by s.989 Income Tax Act (ITA) 2007 which includes any
venture in the nature of trade. Prior to the ITA, Lord Denning in Griffiths v JP
stated, ‘trade’ has its ordinary English meaning instead of being statutorily
defined. This was later clarified by Lord Wilberforce in Ransom v Higgs that
‘trade’ cannot be precisely defined, as it usually involves the exchange of goods,
or of services, but not all services, as some may fall as an employment, a
profession, or a vocation.
Although a trade usually involves continually repeating similar
transactions, Edwards v Bairstow broke new ground that a one-off purchase and
resale of property with quick profit can also be taxed as trading income due to
the wordings in the Act "(ad)venture ... in the nature of trade".
Distinguishing Trade and Capital gain
As per Lord Wilberforce in Simmons v IRC, an item is possible to switch
between trade and capital asset until there is a sale, then it must be one or the
other as this decides whether income or capital gains tax is chargeable. However,
there is serious borderline problem between trade and capital gain due to their
broad and vague definitions.
As a result, the courts created ‘9 badges of trade’ in Marson v Morton as
an authoritative list of factors in determining the existence of a trade. Sir
Browne-Wilkinson confirmed the view in the Inspector's Manual (para 120(c))
that whether there has been a trade is a question of fact.
Firstly, the first badge of isolation concerns one-off transactions. One-off
trade is capable to amount to a trade, but the lack of repetition is an obvious
pointer to suggest it might instead be a capital gain as per Harman J in Bolson v
Farrell, ‘a deal done once is probably not trading. Done three or four times it
usually is’. Hence, isolation transactions are less likely to be trading.
is bought and sold.
This essay will identify the term ‘trade’ for the purpose of income tax
and evaluate how can income be distinguished from capital gains. Vitally,
trading ventures are subjected to income tax under s.5 Income Tax (Trading
and Other Income) Act 2005 whereas investment gains on capital assets are
subjected to capital gains tax under s.1 Taxation of Chargeable Gains Act 1992.
Taxpayers will usually prefer categorising a profit as capital gain due to lower
tax rates and the exemptions.
‘Trade’ is defined by s.989 Income Tax Act (ITA) 2007 which includes any
venture in the nature of trade. Prior to the ITA, Lord Denning in Griffiths v JP
stated, ‘trade’ has its ordinary English meaning instead of being statutorily
defined. This was later clarified by Lord Wilberforce in Ransom v Higgs that
‘trade’ cannot be precisely defined, as it usually involves the exchange of goods,
or of services, but not all services, as some may fall as an employment, a
profession, or a vocation.
Although a trade usually involves continually repeating similar
transactions, Edwards v Bairstow broke new ground that a one-off purchase and
resale of property with quick profit can also be taxed as trading income due to
the wordings in the Act "(ad)venture ... in the nature of trade".
Distinguishing Trade and Capital gain
As per Lord Wilberforce in Simmons v IRC, an item is possible to switch
between trade and capital asset until there is a sale, then it must be one or the
other as this decides whether income or capital gains tax is chargeable. However,
there is serious borderline problem between trade and capital gain due to their
broad and vague definitions.
As a result, the courts created ‘9 badges of trade’ in Marson v Morton as
an authoritative list of factors in determining the existence of a trade. Sir
Browne-Wilkinson confirmed the view in the Inspector's Manual (para 120(c))
that whether there has been a trade is a question of fact.
Firstly, the first badge of isolation concerns one-off transactions. One-off
trade is capable to amount to a trade, but the lack of repetition is an obvious
pointer to suggest it might instead be a capital gain as per Harman J in Bolson v
Farrell, ‘a deal done once is probably not trading. Done three or four times it
usually is’. Hence, isolation transactions are less likely to be trading.
