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Trading Income Notes

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This is an extract of our Trading Income document, which we sell as part of our Tax Law Notes collection written by the top tier of Oxford students.

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TRADING INCOME Basics
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Rules codified in Income Tax (Trading and Other Income) Act 2005
(ITTOIA), Part 2, ss.5 - 259.

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Basic provision contained in s.5
Income tax is charged on the profits of a trade, profession or

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s.7(1) imposes the charge on the full amounts of the profits of the tax year. s.8 provides that a person liable for any tax charged under these provisions is the person receiving or entitled to the profits. S.8 person liable - same as ITEPA

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Key 'trade' problem is whether a given sum is a trading profit or a capital sum.
Key 'profession' problem: is a given person's exercise of a profession (or vocation) carried on outside an office or employment, in which case he is to be taxed as trading? It is accepted that the distinction falls to be made on the same principles as in the law of tort, and also employment law. In tort the distinction is important for vicarious liability - generally described as the distinction between a servant and an independent contractor. In all contexts it is the distinction between a contract of service and a contract or services What is Trading?
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Before the enactment of ITA 2007 and CTA2010, the equivalent definition was in
S832(1) Income and Corporation Taxes Act 1988. It said that 'trade includes every trade,
manufacture, adventure or concern in the nature of trade'.

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s.989 ITA 2007:

"trade" includes any venture in the nature of trade

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Judges have also resisted an exhaustive definition of trade - Ransom v Higgs (1974) HL
concludes that it is possible for something to be a trade even though no one can actually give the trade a name

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The same person may be carrying on two or more separate trades at the same time,
possibly in the same place. If so, it may be necessary for the trades to be taxed separately.
The question whether a particular person is or is not trading is a question of fact.

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Edwards v Bairstow and Harrison (1956) the court can and will reverse a tribunal decision if it is of the opinion that (per Lord Radcliffe) "the facts found are such that no person acting judicially and properly instructed as to the relevant law could have come to the determination under appeal." The Badges of Trade
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Only indicators, not decisive

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Described first by the 1954 Royal Commission on Taxation. Listed six.
Subsequent cases have identified more, but these 6 are still the dominant factors:
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(1) what is sold

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(2) length of ownership

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(3) repetition

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(4) supplementary work

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(5) why the sale took place

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(6) motive (1) What is Sold?
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Generally if the subject matter is such that the purchaser cannot either use it personally or derive an income from it or derive pleasure from it, that points towards trading.
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Rutledge v IRC (1929) - million rolls of toilet paper - not accepted. in Berlin and resale in UK at a substantial profit was held to be trading. This also covers the case of a "one shot deal". WW1 toilet roll shortage, claimed 1 million toilet rolls were for personal use - 1 transaction usually points against trade, but in this case there was a trade.

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Salt v Chamberlain (1979) - thought that he had hit the jackpot by inventing a fool-proof method of investing in shares, he hadn't. He lost a lot of money and tried to claim it as a trading loss. The court held that the shares were bought as investments.

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Marson v Morton (1986) - it was suggested that land could constitute an investment even though it was not income producing.

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Martin v Lowry [1927] - the purchase and resale of aircraft linen was held to be trading. See the judgment of Viscount Cave in particular for reasoning. Aircraft linen for civilian use in UK, said to be trade because of the nature of what is being sold (2) Length of Ownership
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generally a quick re-sale points to trading (3) Repetition
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Generally repetition of a transaction points towards a trade

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Pickford v Quirke (1927) - a director of a spinning company formed a syndicate which bought the shares of a mill-owning company and then sold the assets of that company at a profit. He then took part in three similar transactions. The CA held that he was carrying on a trade, even though each transaction when considered by itself was not an adventure in the nature of trade.

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