#17605 - Badges Of Trade - Revenue Law

QUESTION 1.

The ability to understand the meaning of what constitutes a trade for income tax purposes is one which enshrines great difficultly under Schedule D Case I. Schedule D Case I applies to speculative gains on profits or gains of an “adventure in the nature of trade”, it is affirmed that an adventure in the nature of a trade thus is the, “a transaction entered into on a short-term basis with the view to making a profit out of the purchase and sale of a commodity”. (McLaughlin) The statutory provisions lack an awful lot to be desired here when defining the meaning of trade and what constitutes a trade when entered into to make a tax benefit. S. 3 TCA 1997 defines a trade to be “every trade, manufacture, adventure or concern in the nature of a trade”, while generally it is said that “trade involves, normally, the exchange of goods, or of services, for reward” (Ransom v. Higgs), It is clear that this definition is wholly ambiguous and has been affirmed in Martin v. Lowry, “no word will ever cover the whole ground, no formula which will be correct for every set of facts”. As result, the 6 badges of trade are absolutely vital when dealing with activities which may constitute a trade for tax purposes.

The 6 badges of trade originally arose in the case of Royal Commission for the Taxation of Profits and Income, which was seen to be the courts effort at amalgamating all the previous ideas of the courts regarding the issue of what constitutes a trade. These are as follows; “[t]he subject matter of the realization, the length of the period of ownership, the frequency of transactions, supplementary work on the asset concerned, the circumstances of the realization and finally the motive involved”. In 1986 however in the case of Marson v. Morton, it was recognized that these badges were not an exhaustive list and certainly not to be used as a checklist of some type and in this case a further 3 badges were recognized bringing to a total of 9. The badges of trade are so highly regarded in this area, it has been devoted an isolated section in the Business Income Manual with the inclusion of the interpretation and caselaw on the matter. (McLaughlin). These are seen as an aid to help a judges “overall impression”- Salt v. Chamberlain, and the limit needs to be known when relying on guidance from the badges in an excessive manner as the HMRC have urged that “the presence or absence of a particular badge is unlikely, by itself, to provide a conclusive answer to the question of whether or not there is a trade. The weight to be attached to each badge will depend on the precise circumstances”. It is important now to examine each badge of the 6 originally construed and see how they operate in proactive within the courts, have they been used merely as a guide or are the courts relying much more on them then suggested.

Firstly, with the subject matter of the realization badge, and this is simply the type of asset concerned, here it needs to be distinguished between something which could be classified as land and something which is classified as a commodity. Here it is interesting to look as the case of IRC v. Fraser, where 1,000 bottles of whisky were acquired to be sold for a profit and was considered to be trading whereas in Marson v. Morton, the purchase of land as an investment by a potato merchant was held not to be classed as a transaction in the nature of a trade.

The second badge and once of great importance when considering something to be a trade or not is the badge of time, the length of the period of ownership. The longer the activity the less likely the trade as was seen in McCalls Representatives v. CIR where purchased unmatured whiskey stored whiskey for a number of years to make a profit when the whiskey had matured. In this case unlike the first whisky case mentioned it is interesting because the fact the taxpayer had been storing the whiskey and accruing storage expenses, the activity as a whole had not only been classed as an adventure in the nature of a trade but further applicable under capital gains tax as an assets upon disposal leaving the tax payer liable to the tax under Schedule D Case I, but also the capital gains tax at 20%. It is clear under this badge for something to be classed as a trade, “a fast buck is the essence of a deal” – Turner v. Last.

The third badge concerning the frequency of transaction is also important as there is an abundance of work required in fulfilling a trade and the more activity and work participated in the more likely a trade is being undertaken. For example in Leach v. Pogson, setting up a driving school repeating the activity of selling these schools on was considered to be a blatantly obvious trade. This is fairly straightforward really the more active and repetitive you are the more likely you are to be considered to be carrying out an activity in the nature of a trade.

In addition the fourth badge concerns extra work done onto the asset after purchasing and it is said that any kind of work on the asset is more than likely going to put one in the position of a trade for income tax purposes this is illustrated in the case of Martin v. Lowry where a once off purchase of cotton was classed as a trade as there had been staff and an office obtained to deal with the cotton and sell it on, it could be said that if this cotton was just sold on without the hiring of staff or the renting of an office the result might have been different. An interesting case here to contrast is the case of Mara v. Hummingbird, where there was a clear intention of the purchaser to hold the asset as an investment, however , while in the process of redeveloping the property a very attractive offer came along to sell with which the taxpayer did...