Tax Law LLB Study Notes | Oxford & Cambridge, UK

To calculate A’s tax liability, we must determine what tax statutes apply to him: applying the “control”
over the person test present in Ready Mixed Concrete v. MPNI and other indicators such as “who
bears the risk of loss in a business” present in Addison v. London Philharmonic, [NOT REALLY
NECESSARY HERE, HE’S CLEARLY TRADING, RUNNING A RESTAURNT] John, as he is described as the
“sole proprietor” is self-employed for the purposes of his tax assessment. This matters because the
tests for deductions and income assessment will be governed by ITTOIA 2005.

As a necessary preliminary, it is necessary to establish that John is engaged in a trade, profession or
vocation. This is necessary for calculating whether J has income tax liability as ITTOIA 2005, Part 2, s.5
stipulates that “income tax is charged on the profits of a trade, profession or vocation”. [THIS IS FINE,
BUT NO NEED TO FURTHER DISCUSS]

The definition of “trade” is not precise: in the Tax Acts and the Taxes Management Act 1970 s118(1),
'trade' includes every trade, manufacture, adventure or concern in the nature of trade. This is
definition contains the word it attempts to define: however, it is clear that while it is not essential
that there should be a regular business of buying and selling (Barry v Cordy (Inspector of Taxes)
[1946]), if there is, a trade will be presumed, (as per Lord Wilberforce in Ransom v Higgs: “trade
normally involves the exchange of goods or services for a reward”). In disputed cases, determining
whether an activity is a trade is done on the basis of the “badges of trade”1: these provide guidance
as to whether the activity is a trade, though no one test is decisive: they are: (1) the subject matter;
(2) the length of the period of ownership; (3) the frequency of similar transactions by the same
person; (4) supplementary work on the property realised; (5) the circumstances giving rise to the
realisation; (6) motive. [THE BADGES ARE NOT RELEVANT IN RELATION TO HIS RESTAURANT, ONLY
FOR THE LAND]

Applying this to J’s activities, the operation of a restaurant will be considered trade: not only is having
paying customers, and thus trading, the very purpose of a restaurant (confirming the motive of J’s
activity as sole proprietor of the restaurant), there is much evidence in the text of customers
regularly engaging his services, “Cynthia, a regular customer” and “restaurant’s long-standing
contract to provide catering”. The personal income J receives and the profits from the restaurant are
taxable.

J is not solely engaged in running the restaurant: he also purchased land. We must determine
whether this is trade, and the profits are taxable.

There is nothing to stop a company engaging, and therefore being taxable for, 2 different trades, as
held in Scales (Inspector of Taxes) v George Thompson & Co Ltd . Here, the potential trades are
property buying and running a restaurant. However, this presupposes J’s property buying is a trade:.

We must use the “badges of trade” to determine whether the property sale is trade.

(1)​ Property that neither yields an income nor gives personal enjoyment is more likely to form
the subject matter of trade. Applying this test to J’s situation does not give a clear result:
obviously, the empty plots of land did not generate an income, and it is highly unlikely they
gave J personal enjoyment, which makes it look like the sale of them was potentially trading,
however, the fact that J intended to extend his restaurant, rather than selling it for a profit,

1
the Royal Commission on the Taxation of Profits and Income

, and it was pure happenstance that he sold them on make the subject matter of the
realisation look more like an investment than trading.
(2)​ A quick sale is likely to indicate trading rather than investment. J only held the property for 7
months (maximum) which would indicate a quick sale; however the special reason for the
sale (his inability to secure funds for the extension) rebuts this presumption of trade.
(3)​ Repeated transactions in the same subject matter point to a trade. J has “dealt in land in the
past” which would indicate that he is trading in land. However, it is unhelpful to consider the
badges of trade separately, when J’s motivation (6) might indicate this is not trade. If J’s
motivation for dealing in land in the past was to realise a profit i.e. buying and selling houses
(playing the property market), this motivation is different from buying the plots now, where
his motivation was to extend his restaurant on to them. As such, the fact that he has deal in
land in the past may point to trade then and not now, by looking at his motivation for both
sequences of activity.
(4)​ An investment will normally be held passively by the person concerned either while he
receives the income or until he can realise a capital gain from selling it. J procured planning
permission for one of the plots, which may indicate but did nothing to the other: it was held
in Taylor v Godd that the mere enhancement of value, as y obtain planning permission is not
sufficient to create a trade: as such this test does not indicate J’s purchase of the plots was
trade. [A GOOD POINT]
(5)​ The circumstances of the sale of the plots is not made explicit in the text, however it does
not seem that there was any emergency calling for such a sale to be made. [POSSIBLY HIS
PLANS FOLLOWING THROUGH FOR LACK OF FINANCING] However, this does not prevent a
conclusion that the sale was not trade, as all the tests must be looked at together. Motive (6)
has already been addressed with frequency (3) above.

Applying these “badges of trade”, the sale of the land is unlikely to be trading, therefore the profit for
one plot, yet overall loss when combining the 2, is not taxable, or in the case of the loss, deductable.
[AS YOU NOTE BELOW THE SECOND PLOT IS LESS CLEAR. IN FACT HE MAY NOT BE TRADING IN IT AT
ALL. MORE GENERALLY, YOU MADE VERY GOOD USE OF THE FACTS IN YOUR ARGUMENT AND THE
BADGES BUT IT IS IMPORTANT TO DISCUSS MORE OF THE CASES IN A BADGES ISSUE, AND DRAW
ANALOGIES TO THE FACTS AT ISSUE HERE – CASES OF PARTICULARL RELEVANCE WOULD BE MARSON
V MORTON AND KIRKHAM V WILLIAMS]

We must compute his taxable profits from his trade.

The profits of a trade must be calculated in accordance with generally accepted accounting practice,
subject to any adjustment required or authorised by law in calculating profits for income tax
purposes (S.25(1) ITTOIA). We must determine what the net profit for J is, in order to determine his
tax liability: net profit must therefore be calculated so as to add all trading receipts and income
receipts together before deducting allowance expenses. [GOOD, PERSONALLY I’D START WITH THIS
AND LEAVE THE BADGES TO THE END BECAUSE FROM A TIME MANAGEMENT POINT OF VIEW YOU
CAN SAY A LOT ON BADGES IF YOU HAVE TIME, REALLY SHOW OFF YOUR KNOWLEDGE OF THE CASES,
AND IF YOU DON’T HAVE TIME YOU CAN CUT TO THE CHASE WITH JUST THE KEY CASES. BUT IT’S
NOT A BIG DEAL]

,There are 4 payments J receives that might be trading receipts: 1) the payment for Cynthia’s party 2)
the additional cheque for £250 from Cynthia 3) the cancellation fee from the local college 4) The
payment for Christmas party held at the restaurant in 2009, booked one year in advance, deposit was
paid on booking and then set against the final bill

To be a trading receipt, the sum must fulfil 2 requirements:

1) the sum must be derived from trade and not made voluntarily “in recognition of some personal
quality” of the recipient, as held in Murray v Goodhews, where payments were made to
acknowledge a good relationship and maintain a good name. [GOOD]

2) the sum must be income not capital, (s.96(1) ITTOIA) The traditional test for this is distinguishing
between the fixed capital of a business and its circulating capital: the analogy used by Lee to explain
the complex terminology is the fruit tree – the tree is the capital producing the fruit which is income.

1) Payment for wedding party: this payment is “in return for services” as the service provided was
the organisation of the Christmas party. Payment for this therefore is a trading receipt. [GOOD]

2) the additional cheque: this was made ‘with gratitude’, however, just because it was voluntary does
not preclude it from being a trading receipt, as shown by IRC v Falkirk Ice Rink, where the donation
from a curling group to save the ice rink from closure was held to be taxable [AND POSSIBLY HERE A
SIMILAR TOP-UP TYPE PAYEENT AS IN FALKIRK GIVEN THE ‘ADVANTAGEOUS PRICE’]. Therefore we
must determine whether it was for personal qualities or service: arguably, the letter thanking John
for his efforts which went ‘beyond the call of duty’ indicates the £250 payment was made on the
basis of a personal quality: if the first cheque was a reward for services, this second cheque might be
considered for personal qualities since the behaviour which gave rise to an extra payment was not
within the bounds of what was required of John. However, if this was the case, a pleasant waitress2
who received a tip on that basis might claim she was entitled to this tax-free as she was going beyond
what her job required her to do i.e. clear plates. However, J was paid for being exceptionally good at
providing his services, not for personal qualities irrelevant to his success as a restaurant owner. As
such, it is likely (and fair) that such a payment should be considered a trading receipt and therefore
add to his tax liability.

3) The cancellation fee: whether this is a trading receipt depends on the significance of the cancelled
contract to the business, as held in Van den Berghs Ltd v Clark, where the cancelled contract was
considered a lost asset to the company. Kelsall Parsons & Co v IRC held that where the contract is of
short-duration and one of many, it is likely the fee will be a trading receipt. Here, it was a
“long-standing contract” and “the loss of the contract was a major blow to John’s business” with the
result he had to make several employees redundant. It is possible that given the nature of the
contract (one to provide services) a distinction might be drawn with Van den Berghs, whereby the
contract was made for the purpose of avoiding competition: the contract of service for a restaurant,
though its cancellation may result in serious consequences for the business, may be considered one
of many, especially given C’s promise to hold more parties at J’s restaurant. However, it is likely that
given the consequence of the cancellation, the contract can be considered a lost fixed asset of the



2
Though here we are referring to an employee, the rules are similar

, business as in Van den Berghs. As such, the payment would be capital and not income. [WELL
ARGUED]

4) Payment for Christmas party in 2009: this payment is “in return for services” as the service
provided was the organisation of the Christmas party. Payment for this therefore is a trading receipt.

There is also the question of “self-supply” with J’s lunches at the restaurant: if an item of trading
stock is disposed of otherwise than in the ordinary course of the taxpayer’s trade, it must be brought
into account as a trading receipt at its market value at the date of the disposal because it is not a
“payment” as such but represents a taking from the trade, as held in Sharkey v Wernher and
subsequently enshrined in ITTOIA s172B and CTA ss156-161. However, the decision is not considered
to apply to “the value of meals provided for the proprietors of hotels, boarding houses, restaurants
etc” as stated in SP A32: however, Lee notes that the SP A32 has an unclear role now since the
legislation does not specifically refer to it: if the “relaxation” is intentionally omitted from ITTOIA, J
would be liable for tax on the market value of his meal, which would be £25 x the number of meals
he self-supplied. [LESS THE £4 COST OF EACH MEAL WHICH IS DEDUCTIBE IF SHARKEY APPLIES AND
NOT DEDUCTIBLE PURSUANT TO THE WHOLLY & EXCLUSIVELY TEST IF SP A32 APPLIES]

While the property selling is unlikely to constitute trade, if it is considered trading, the overall result
for the sale of the 2 plots is a loss of £25,000: as this is not a profit it cannot be considered to add to
J’s tax liability. Whether this is deductable as a loss is addressed below.

A further issue arising from the disposal of an item of trading in a way other than trade is the
possibility that if the buying and selling plots of land does constitute trading, the sale of the plot to
the school would not be taxed as a receipt for market value, as an owner is permitted to sell his
goods at below market value so long as the transaction is a genuine trading one. [THIS IS VERY
GOOD, BUT STRUCTURALLY I’D BRING THIS DISCUSSION TOGETHER WITH THE BADGES ANALYSIS AND
DEAL WITH THAT ISSUE IN ITS TOTALITY IN ONE PLACE] The sale to the school is indeed below the
market value, since the other plot sold for £200,000, and John could probably have obtained
planning permission for the other plot also, which would have raised its value. However, the
transaction was a trading one – and J is entitled to sell the plot for less than market value – so if,
though the contrary is argued above, the property sale constitutes trading the sale of the plot for a
playground would not be brought into account by taxing its market value, but rather the £75,000 it
was sold for. The same rule applies to the “wedding dinner at an advantageous price” – John would
not be taxed at market value, as the transaction was a real trading transaction. [GOOD, BUT AGAIN,
BETTER TO DEAL WITH THIS WITH THE REST OF THE DISCUSSION ON THE MEAL, WHICH PROBABLY
MEANS PUTTING THE ANALYSIS OF THE MEALS HIGHER UP IN YOUR ANSWER SO WHEN YOU COME
TO THE DINNER PARTY AND LAND YOU CAN DEAL WITH IT QUICKLY BECAUSE YOU’VE ALREADY
EXPLAINED SHARKEY IN RELATION TO THE MEALS]

We must determine which of these receipts are taxable for this year.

The general principle is that receipts are trade receipts in the period in which payment becomes due,
even if actual payment is postponed, as held in JP Hall & Co Ltd v IRC. Thus, items may become trade
receipts irrespective of actual payment.