Mark McLaughlin warns that HMRC might resist claims of an activity amounting to trading, particularly if losses have been incurred.
It is relatively common for an individual to have a ‘sideline’ activity to their main occupation. The question arises whether that activity amounts to a trade. HM Revenue and Customs (HMRC) often argue that the individual’s activity is a taxable trade.
Wearing the badge(s)
However, sometimes individuals (as opposed to HMRC) contend that their activity is a taxable trade (rather than an investment activity or hobby). For example, the activity may be loss-making, and the individual might claim that the activity amounts to a trade, with a view to obtaining ‘sideways’ loss relief against their other income.
Unsurprisingly, HMRC examines many such sideways loss relief claims, with a view to challenging the existence of a trade (i.e., no trade = no trading loss). Unfortunately, there is very little statutory guidance on the meaning of ‘trade’.
The ‘badges of trade’ can sometimes be helpful. These were first established by the Royal Commission for the Taxation of Profits and Income in 1955, using previous case law about what constitutes a trade. Subsequently, a total of nine badges were identified (Marson v Morton Ch D 1986, 59 TC 381). HMRC’s Business Income Manual (at BIM20205) lists the ‘badges’ as follows:
1. Profit-seeking motive.
2. The number of transactions.
3. The nature of the asset.
4. Existence of similar trading transactions or interests.
5. Changes to the asset.
6. The way the sale was carried out.
7. The source of finance.
8. Interval of time between purchase and sale.
9. Method of acquisition.
However, case law indicates that the badges of trade should not be used as a checklist. HMRC’s guidance states: “The weight to be attached to each badge will depend on the precise circumstances”.
Trading or investing?
The nature of activities such as share transactions by individuals raises the issue of whether they constitute trading or investment; the latter normally falls within the capital gains tax regime, so income tax relief as trading losses is unavailable.
For example, in Henderson v Revenue and Customs [2023] UKFTT 00281 (TC), the taxpayer, a partner in a professional firm, bought and sold shares in his personal capacity for a number of years from early 2006. In mid-2014, he inherited a substantial amount of money and retired from the partnership in January 2016. The taxpayer placed most of his inheritance in an investment account, where investment decisions were made by fund managers. He also resumed making share transactions and claimed trading loss relief in respect of them. However, HMRC contended that the activities did not amount to a trade or that if they did, the trade was not conducted on a commercial basis.
The First-tier Tribunal noted that the average trades for the periods under review numbered just over one per week, with a maximum of nine trades in a single week and several weeks with no trades. Additionally, the time spent by the taxpayer (1-2 hours per day) did not support the contention of trading. His appeal was dismissed.
Practical tip
As indicated in Henderson, even if it is accepted that there is a trade, if the trade is not undertaken on a commercial basis with a view to the realisation of profits, sideways loss relief will not be available.
