Trading Income

Trades and Professions

Persons who are self-employed, in business on their own account, are taxed as a business or trade. The independent contractor / employee distinction, discussed in our employment guide is relevant in this context.

Most businesses / self-employed activities will constitute a trade. The so-called “badges of trade” are relevant to determine whether a particular activity is a trade for the purpose of taxation legislation. (UK guide)

Professions and  trades are in  separate tax categories, but the applicable rules are almost identical. A profession is not defined. The characteristics of a profession is that it involves some element of intellectual skill or manual skill controlled by intellectual skill. For this purpose of this chapter references to a trade and trading income refer to both the Trade and Profession categories under tax law.

Significance

Whether an activity is subject to income tax or capital gains tax is of key importance,  in that the rules and rates differ. At present, the marginal rate of income-tax is 41%, while that of capital gains tax is 25%.

Most income transactions will also be subject to the levies and Universal Social Charge. Capital gains transactions may be entirely exempt A wasting asset is not subject to CGT at all. A wasting asset is one with an expected life of less than 50 years.

The profit (in any) on the sale of a single car may not be taxable being outside the scope of income tax, subject to CGT but exempt, as  a wasting asset. If a number of cars are bought and sold, this is more likely to be deemed trading. It is possible, exceptionally, that the sale of single car purchased and sold with a view to a profit, could be deemed a trade.

What is Trading

What constitutes trading, can sometimes be difficult to ascertain. With most business activity, it will be clear that trading is involved. However a single or a number of isolated transactions may  or may not constitute trading.

Even a single transaction might be assessed as a trading transactions or a so called “adventure in the nature of a trade”. Alternatively, it may be a capital gains tax transaction.

In general, where the sale and purchase is made with the intention of realising a profit,  it is likely to be trade. A trade includes any manufacture of business or concern adventure in the nature of our trade. [   the badges of trade]

Characteristics of Trade

A trade has been defined as habitually doing or contracting to do something, capable of producing a profit. A once off purchase and sale can be a trade.  A company or person may conduct a number of different trades. A so called adventure in the nature of a trade is subject to income tax.  However, the sale of an asset does not necessarily imply a trade. The entire circumstances must be considered to determine if there is a trade.

If an asset is purchased with the intention of reselling at a profit, it points to a trade. It is relevant to consider whether there are similar transactions, whether other trades are carried out, how activities are financed, whether the items are normally trade items, what work was carried out, whether items have been broken into lots.

Investment v Dealing

The core of the distinction is between investment and dealing. Certain types of assets, particularly those such as commodities, are more likely to the subject matter of trading and will rarely be the subject matter of investment.

An asset can be an investment in the context of one business but  could be a trading asset in another. It is possible to trade in  shares and land.

Developers trade in land. There is special legislation which deems land transactions to be trading transactions, even where a similar transaction in another class of asset would not be trading. The sale and purchase of the business premises is likely to be a capital transaction. However,  a single speculative purchase with a view to a profit is likely to trading.

Badges of Trade

The so called badges of trade refer to criteria which point towards an activity being  trading in nature;

• The length of ownership; assets held for shorter periods are more likely to be held for a trading purpose. The frequency of the same sort of transactions is a significant hallmark of a trade.
• Working on an asset and adding value to make it or marketing. The presence of a workforce, sales, distribution and marketing capacity is relevant.
• The motive and circumstances of the sale.
• Short-term financing is indicative of income as it tends to imply a shorter holding period.
• Relationship to the trade of the taxpayer