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1. Definitions The Badges Of Trade Notes

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Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law

1. DEFINITIONS - THE BADGES OF TRADE: DEFINING TRADE, PROFESSION AND VOCATION

1. Definitions

2. Badges of Trade A. Subject Matter of the Realisation B. Duration of Ownership C. Frequency of Transactions D. Supplementary Work (or Evidence of Business Organisation) E. Circumstances Responsible for Realisation F. Motive and Subjective Intentions

3. BCL Past Exam Questions & Essay Plans _________________________________________________________________________________

1. Definitions

Section 5 Income Tax (Trading and Other Income) Act (ITTOIA) 2005 charges income tax on the profits of a "trade, profession or vocation" of a self-employed sole-trader, and for present purposes the word "trade" may be taken to cover the other two terms.

"Vocation" - Denman J in Partridge v Mallandaine "The word "vocation" is analogous to "calling," a word of wide signification, meaning the way in which a man passes his life. The appellants attend races, make bets, and earn profits. Is it to be said that, under these circumstances, they are not to be assessed to the income tax, although every year they may have bets paid which put a thousand pounds into their pockets. I think the word "vocation" is not limited to a lawful vocation, and that even the fact of a vocation being unlawful could not be set up against the demand for income tax" "Profession" - Scrutton LJ in IRC v Maxse "…"Profession" in the present use of language involves the idea of an occupation requiring either purely intellectual skill, or of manual skill controlled, as in painting and sculpture, or surgery, by the intellectual skill of the operator, as distinguished from an occupation which is substantially the production or sale or arrangements for the production or sale of commodities."

Section 5 ITTOIA also charges income tax on the profits of any profession or vocation, neither of which are defined by the statute; and in IRC v Maxse it was held that a newspaper reporter carries on a trade but a journalist carries on a profession The question is one of fact and degree where the level of intellectual skill is crucial

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Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law

"Vocation" has fallen out of use but is treated by tax law as analogous to a calling; a dramatist, a racing tipster and a jockey have all been held to be carrying on a vocation, but not a film producer or a gambler

Section 6 ITTOIA imposes a charge on a UK resident in respect of the trade wherever it is carried out, but on a non-resident only in respect of trading activities within the UK "Trade" is defined statutorily for income tax as including every venture (trade, manufacture, adventure or concern) in the nature of trade (Section 989 ITA 2007) It therefore suffices that a one-of activity can count as a taxable trading (with the receipts charged to income tax), and need not be a continuous or repeating activity (e.g. Rutledge). Judicial definitions have been given sparingly; in Ransom v Higgs, Lord Reid said that the word is "commonly used to denote operations of a commercial character by which the trader provides to customers for reward some kind of goods or services" The question whether there is a trade is one of fact; it is for the Commissioners and the Tribunals to determine the primary facts and to draw conclusions from them

2. Badges of Trade

In order to ascertain whether the activities of a taxpayer constitute a trade or activity in the nature in of a trade, and are therefore activities giving rise to taxable profits under what is now Section 5 ITTOIA the Royal Commissioners (1955) listed six "badges of trade": A. B. C. D. E. F.


The subject matter of the realisation Duration of ownership Frequency of similar transactions by the same person Supplementary work on or in connection with the property realised Circumstances responsible for the realisation Subjective motive

The courts have since developed further badges (see e.g. Marson v Morton) It is important to realise what the badges are intended to do: the goal of the court is to find out the intention of the taxpayer, and it is suggested that the badges are objective ways of ascertaining that intention where the subjective intention is insufficient or indeterminable. Hence it will be seen below that subjective motive gives way to the objective facts.

A. Subject Matter of the Realisation

The courts take the view that certain commodities are more likely to be acquired as investments than as the subject of a deal e.g. wine, gold coins, reversionary interests, antiques and works of art. 2

Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law

If the object does not yield income but can be enjoyed in kind, so that there is pleasure or even pride in its possession, as where a person buys a picture for aesthetic enjoyment purposes, any profit on resale will escape income tax.

Rutledge v Inland Revenue Commissioners (IRC) - Resale of Toilet Paper

A money-lender, visiting Berlin on business, purchased from a bankrupt German firm a large consignment of toilet paper and arranged for delivery to England, but before delivery the taxpayer found a purchaser in London, to whom he resold the whole consignment for a huge profit - this transaction was outside the scope of his ordinary business as a lender It was held that, although the transaction was isolated, it was an adventure in the nature of a trade, the profits of which were assessable to income tax: the purchase and reseal were of the same kind as those which characterised ordinary dealing of such paper

Lord Clyde


An adventure it certainly was, for the appellant made himself liable for the price of this vast quantity of toilet paper for no other purpose that that of reselling it at a profit. Intention alone is not enough to make it a trade but on the question whether the appellant entered into an adventure or speculation, the appellant's intention in making the purchase does enter into the solution of that question On the question of whether this adventure was "in the nature of a trade" the appellant argued that it could not be such because for trade there should be a continuous series of trading operations... But the question is not whether this was a trade, but was an adventure in the nature of a trade, and it is no doubt true that this question depends on the character and circumstances So if the purchase is made for no purpose except that of re-sale at a profit, there seems little difficulty in arriving at the conclusion that the deal was "in the nature of a trade", although it may be wholly insufficient by itself to constitute a trade This adventure was carried through in exactly the same way as any regular trader would carry through any of the adventures in which it is his regular business to engage/
Therefore the purchase and resale of the paper was an "adventure in the nature of a trade" But suppose the taxpayer on his business trip to Germany had seen a picture for sale which he admired and realised would likely appreciate in value… had he sold it on at a later date then it might be impossible to conclude that this was an "adventure in the nature of trade" 3

Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law

Comment

The purchase of a commodity which gives no pleasure and which cannot be turned to account except by the process of realisation, may well give rise to a taxable profit This might depend not only the nature of the product (such as railway tracks), but also the quantity of the commodity being sold, such as the toilet paper in IRC v Rutledge Moreover, in Rutledge the taxpayer had no intention apart from profitable resale.

Inland Revenue Commissioners v Fraser - Resale of Whisky

The respondent, a woodcutter, bought through an agent for resale whisky in bond for £407; the whisky was sold 3 years later for £1,131 - this was his sole dealing in whisky The Commissioners found that the respondent had merely made an investment and that the profit on its realisation was not assessable to income tax; the Court of Session disagreed

Lord President Normand

These matters are open to review: the Appeal Court always has jurisdiction to intervene if it appears either that the tribunal has misunderstood the statutory language - because a proper construction of the statutory language is matter of law - or that the tribunal has made a finding for which there is no evidence or which is inconsistent with the evidence In most cases the error is really one of law, and results from a misunderstanding of statute... We are not being asked to decide whether the respondent was carrying on a trade, but whether the transaction in which he was engaged was an adventure in the nature of trade; we were asked by the respondent to treat the shipment as one piece of business... It would be extremely difficult to hold that a single transaction amounted to a trade, but it may be much less difficult to hold that a single transaction is an adventure in the nature of it The individual who enters into a purchase of an article or commodity may have in view the resale of it at a profit, and yet it may be that that is not the only purpose for which he bought the article or the commodity... A man may purchase land with a view to realising it at a profit, but it also may yield him an income while he continues to hold it… and if he continues to hold it, there may be a certain pride of possession [and it will be not subject to income tax, being a non-trade investment]. But the purchaser of a large quantity of whisky, greatly in excess of what could be used by himself, his family and his friends, a commodity which yields no pride of possession, which cannot be turned to account except by the process of realisation [is subject to income tax]
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Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law

The fact that the transaction was not in the way of the business of the taxpayer [as a wood-cutter] in no way alters the character which almost necessarily belongs to a transaction like this - the actual dealings of the respondent with the whisky were exactly of the kind that take place in ordinary trade…

The case which comes closest to the present is Rutledge v IRC where it was held that the transaction, although isolated, was an adventure in the nature of trade... because it was carried on in the same way as those which characterise ordinary dealing

Marson (Inspector of Taxes) v Morton - Resale of Land: Investment or Trade?



The taxpayers owned a company trading as a wholesale potato merchant, and on the advice of an estate agent (L), they decided to invest a trading surplus into land The land had the benefit of planning permission but produced no income The taxpayers then sold the land, making a profit. The Commissioners found that as L had not been instructed to sell at any particular price or time, the transaction was akin to an investment in stocks and shares and was far removed from any trading activity of the taxpayers. Browne-Wilkinson VC then held that the Commissioners had not misdirected themselves.

Nicholas Browne-Wilkinson VC

The Revenue, while accepting that the question whether or not a particular transaction is an adventure in the nature of a trade is a question of fact, claim that this case falls within the exceptional class of case dealt with in Edwards v Bairstow in which the court found that on the facts, the true and only reasonable conclusion was missed by the Commissioners. In dealing with appeals of this nature there is a band of cases called the "no-man's land" in which different minds come to different conclusions on the question whether or not there was an adventure in the nature of trade; if the case falls within such a band then in the absence of misdirection on the face of the decision, the court cannot intervene…
There is only one point which as a matter of law is clear; that a single, one-off transaction can be an adventure in the nature of trade (Rutledge, Fraser) ... but the most I have been able to detect from the reading of the authorities is that there are certain badges which might point to one conclusion rather than another:

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Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law

1. That the transaction in question was a one-off transaction; the lack of repetition is a pointer which indicates that there might not be a trade, but something else.

2. Is the transaction in question in some way related to the trade which the taxpayer otherwise carries on? If so, it is more likely to be an adventure in the nature of trade

3. The nature of the subject matter: was the commodity of a kind which is normally the subject matter of trade and can only be turned into advantage by realisation, such as a large bulk of toilet paper or whisky? If so, this is more likely trade.

4. The method in which the transaction was carried through: was this method typical of the trade?

5. Source of finance for the transaction: if the money was borrowed then this points to an intention to buy the item with a view to its resale, and therefore points to trade.

6. Was the item purchased resold as it stood or was additional work done to it; if there was such work, this points towards the transaction being done in trade.

7. Was the item purchased resold in one lot as it was bought, or was it broken down into saleable lots? If it was so broken down, this is an indication of nature of trade.

8. What were the purchaser's intentions as to resale at the time of purchase? If before the contract of purchase was made, a contract of resale was already in place, this is a very strong pointer towards trade.

9. Did the item purchased either provide enjoyment for the purchaser or pride of possession? If it did, then this may be for personal satisfaction and not for trade.

It seems to me that the present case is essentially a case which falls in the no-man's land where different minds might reach different conclusions on the facts found…
It was a one-off deal and it was a deal for land which as outside the ordinary trade of potato merchants, the taxpayers used to a large extent their own money (although financed half of the purchase through borrowing - but did not even know they were borrowing as such), the property was sold in one lot without any work done to the land, and land - unlike toilet paper or whisky - is not a commodity which is incapable of realisation other than by way of quick sale: these point towards the transaction being one of investment rather than trade

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Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law

Counsel for HMRC suggested that the lack of rent or rental income indicated strongly that the transaction was not an investment but was a trading creature... However, institutions now purchase works of art by way of investment, and in my judgment these are plainly not trading deals even though no income is produced from them I can see no reason why land should be any different, and the mere fact that land is not income-producing should not be a decisive or even virtually decisive factor...

Comment

Marson v Morton stressed that it was no longer self-evident that land could not be an investment unless it produced income; while the legal principle could not change, life itself could: due to rising inflation and higher rates of income tax, new approaches to investment have put the emphasis on making capital profits instead of yielding income Therefore, tribunals should not treat new investments as falling within ITTOIA as trading adventures simply because those interests did not generate income.

B. Duration of Ownership

A "fast buck" is the essence of a deal: a long period between the acquisition of an asset and its disposal may corroborate an intention to hold it as an investment; conversely a quick deal indicates that the acquisition was made with that intent One element of an investment is that the acquirer intends to hold it for some time, with a view either to obtaining some benefit in the way of income in the meantime or obtaining some profit, but not an immediate profit by resale.

Turner v Last - Time between Purchase and Sale

The appellant taxpayer was a farmer who bought two fields which to that date he had rented; he intended to resell ¾ acre of one of the fields ("Green Field"), which had planning permission obtained for it already. When he was assessed to income tax for that year, he contended that his business was solely that of farming, and that except for the ¾ acre, he had purchased the whole of the land with the intention of farming rather than reselling the land as part of a trade. The General Commissioners found that when the taxpayer purchased the land he must have had an intention to resell, and that his profit arose from a trade Cross J upheld the Commissioner's findings.

Cross J

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