Trading income is taxed for both income tax and corporation tax purposes. In order for a tax charge to arise under the trading income rules, there must be a trade. It is therefore necessary to understand what constitutes trading, and when a trade commenced or ceased.
Indicators of trade
To determine whether a trade exists, historically the courts have looked for the presence of absence of certain key defining features. In 1955, the Royal Commission of Profits and Income Tax reviewed existing case law and identified six ‘badges of trade’. The concept has evolved over time, and the following indicators can be used to provide an overall impression as to whether a trade exists.
It is important to note that there is no single ‘badge’ that provides conclusive proof of a trade – rather, it is a question of looking at the characteristics of trading and the extent to which they are present or absent to form an overall impression of whether there is a trade. The weight attached to each ‘badge’ will vary depending on the particular circumstances and the type of business.