· Apply the ‘badges of trade’ to determine whether a transaction is a trading activity.
· Describe the scope of taxation of trading income.
· Determine the tax consequences of consumption of own goods.
· Explain and apply the ‘capital v. revenue’ principle.
· Adjust a profi...
Trade, profession, or vocation
‘Every trade, manufacture, adventure, or concern in the nature of trade’
Court guidance on badges of trade
Is it a trade or a hobby?
Is it a trade or a capital transaction?
THE BADGES OF TRADE:
The Subject Matter
– Martin v Lowry (1927)
– Rutledge v CIR (1929
Supplementary Work and Marketing
– Cape Brandy Syndicate v CIR (1921)
The Frequency of Transactions
– Pickford v Quirke (1927)
Reason for sale
The Length of Ownership
A Profit Motive
– Wisdom v Chamberlain (1969)
– Taylor v Goode (1974)
CONSUMPTION OF OWN GOODS:
Trader who takes finished goods out of the business for his own use must account for the
market value of the goods
This rule does not apply to raw materials or to services.
LECTURE ACTIVITY
John runs a newspaper shop. He reported taxable profits of £12,000. The Inspector of Taxes asks
whether he smokes any of the cigarettes in the shop. John answers that he is a non-smoker but that
he has eaten a large number of fruit gums during the year. The cost, included in cost of sales and
sales, was £60. The normal mark up on cost is 40%.
, What adjustment will HMRC require? Would the answer be different if John was a professional
painter and had taken a painting home for his own enjoyment.
Answer:
John is involved in a trade, and hence must be assessed on the ‘profit’ made by selling goods to
himself at market price.
The profit to be assessed is £60 x 40% = £24. John has already accounted to the business for the
cost, so only the profit element needs to be adjusted for, £24.
If he had been a painter, no adjustment would be required.
£1,000 TRADING ALLOWANCE:
Gross receipts of £1,000 or less are exempt from tax
If gross receipts are more than £1,000 compute tax adjusted profits in normal way
However you can elect to treat the £1,000 as an allowance
This is similar to the Rental exemption (see Unit 4)
• A ‘small’ business is allowed to compute its profits for tax purposes on the cash basis i.e. the
difference between cash received and cash paid
– No recognition of inventory or receivables
– No distinction between capital and revenue
• A ‘small’ business is one whose total receipts does not exceed £150,000
– must stop when receipts reach £300,000
• Special rules:
– Expenses on purchasing a car is not allowed – must claim flat rate mileage allowances
instead
– Expenses on land and buildings are not allowed
– Loan interest is allowable up to a maximum of £500
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