In an earlier blog, I looked at the profit-seeking motive as a badge of trade, and one of the points I made was that over a period of time your motive can change from being purely a hobby to seeking opportunities to making sales and profits.
Another factor allied to this is the volume or transactions and the existence of similar transactions. These are two of the other badges of trade.
At its simplest and most obvious, the greater the number of transactions, the more likely it is that you will be classed as trading. A single isolated transaction will not usually lead HMRC to the conclusion that you were carrying on a trade, but it’s not impossible (especially if other badges of trade are present). The transaction, if it is to be trading for tax purposes, has to be a venture in the nature of trade.
The test applied by HMRC is whether the operations involved in the transaction are of the same kind or character, and carried on in the same way, as those which are characteristic of ordinary admitted trading in the line of business in which the transaction was carried out. The good news is that this test requires an examination of all the badges of trade to evaluate the extent to which they characterise the facts of the case under consideration.
You might like to consider the case of Commissioner of Inland Revenue v Fraser (taking place in 1942, this predates the report which identified what was then six badges of trade). Mr Fraser was a woodcutter by trade, but he purchased a consignment of whisky and sold it through and agent (making a profit). In this particular case many of the then badges of trade were either neutral or favourable to Mr Fraser. However, he was still held to be trading. Why? Because the amount of whisky he purchased was far larger than the amount it would be reasonable for a private individual to buy for consumption for himself, his family and his friends, it wasn’t something that he could show off with the ‘pride of possession’ (according to the court – although seasoned whisky drinkers may disagree!), and he could only make use of so large a quantity by realising its worth. Therefore this was a transaction in the nature of a trade and, more importantly, Mr Fraser’s actions were entirely of the kind that take place in ordinary trade.
Of course, if he had been able to lay his hands on that quantity of a rare single malt whisky (in which he could have taken pride of possession) or which he could have shown that he purchased as an investment, then the outcome might have been different. (But then he might have incurred CGT – although in general spirits are exempt, HMRC’s view is that this does not apply where the liquid in question matures well and therefore is not a wasting asset!)
Looking at the test of similar transactions, although an isolated transaction can, as we have seen, amount to trading, it is generally the systematic repetition of a transaction that is a pointer towards trading. Where sets of operations, each set not in itself constituting a trade, are carried out on occasions not widely separated in time, the series of operations may amount to the carrying on of a trade. It’s not just the number, but also the frequency with which they are repeated. Ten transactions every year would, all else being equal, be more likely to amount to trading than say two transactions every year.
And finally, if you are already trading in one area and you carry out a transaction which appears to have a similarity to transactions in your existing trade – you are likely to have great difficulty in convincing HMRC that this transaction is not also trading!