Summary First Class Problem Question Notes on Trading Income Tax
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University College London (UCL)
I achieved 71.5% (first class) in every problem question using these Trading Income Tax notes in my open book exam in 2022.
These notes are the product of highly extensive further reading of every article and case note for each sub-topic (via Westlaw and Lexis Nexis as well as other legal sourc...
TRADING INCOME
The Charge
X will likely be subject to income tax under Section 5 of ITTOIA (Income Tax (Trading and Other
Income) Act 2005) imposes charges to income tax on the profits of a trade, profession, or vocation.
However, it should be noted that ITEPA takes priority over ITTOIA (s4(2)).
Clear-cut trader
S989 provides that "an adventure in the nature of trade should be taxed as trade", but this is a circular
and unhelpful definition so we must look to the significant case law. X operates a Y business,
providing customers with Z services for reward (Ransom v Higgs) and so carries on a "trade" (s5).
o A one-off transaction can be trade (Martin v Lowry), but that is because there was no CGT before 1965
so one-off gains could be taxed under trade.
o CIR v Livingston [1926]: the operations are characteristic of ordinary trading in that line of business
o Ransom v Higgs (1974) (Lord Wilberforce): Non-exhaustive definition of trade; fact finding mission.
o Erichsen v Last (1881): Cluster concept of trade
o Often in HMRC's favour to not classify it as a trade because then the person can claim losses as
deductible expenditure.
Profits
They must be assessed for income tax under ITTOIA on the full amount of their trading profits for the
tax year (s7). To calculate profits we must subtract deductible expenditure (DE) from trading receipts
(TR). TRs must be derived from trade (Harry Ferguson) and of a revenue and not capital nature (s96).
DEs must be wholly and exclusively for the purposes of the trade (s34(1)); facilitate the earning of
profit (Strong v Woodfield) and of a revenue and not capital nature (s33; noting useless definition of
income per s878).
Accounting and Basis of Assessment
Per s25, their profits must be calculated according to generally accepted accounting practice subject
to required legal adjustment, using an earnings basis of accounting. X may be able to elect to use a
cash basis (s25A) given that their business is quite small (ss31A-31B). ITTOIA uses a current
year basis of assessment (ss197-220) so X will start paying tax on her profits during the tax year (6th-
5th April) that the accounting period ends. I should note that in the future X might be affected by the
introduction of a 'tax year' basis of assessment, which will start to be introduced from 2023-2024
Profession
X might be carrying on a 'profession'. This term is not defined in statute, so we must look to the case
law. A profession on the most part involves "intellectual, manual or artistic skill" (IRC v Maxse).
IRC v Maxse (1919) - Journalist = professional
o The sole proprietor, editor, and publisher of a monthly magazine (purchased for
£1500) is a profession of a journalist and editor
o But only journalists whose contributions have "any literary form" exercises a
profession, while the proprietor of a newspaper (controlling the printing, publishing
and advertising, but not responsible for its artistic contents does not exercise a
profession, but probably a trade
Davies v Braithwaite (1931) - Actress/Series of Engagements = professional
o Actress fulfilled a series of engagements across the world using her professional
qualifications: various stage plays; films; TV; wireless and gramophone companies and was
thus a professional.
o Rowlatt J held that the question does not turn on the degree of skill or duration of the
engagement (you can be skilful and be in employment).
Vocation
X might be carrying on a 'vocation' which has a wide meaning related to the way a person passes his
life and indicates a 'calling' (Partridge).
Partridge v Mallandaine (1886) - Bookmaker = vocation
, o The bookmaker attended races, made bets and earned profits for which, as Hawkins
J holds, he should be taxed for.
o NB: Vocation is not limited to a lawful vocation.
C.f. Graham v Green (1925) - Better on horses = not vocation
o The taxpayer's aggregate winnings were not derived from a trade as, unlike the
bookmaker, he didn't have a system of operation or an organised effort to calculate
odds of various horses over a long period of time. The man who bets with a
bookmaker are making mere bets. There is no tax on a habit.
o There may be a cynical reason for this distinction – more people lose so they want to
tax the bookmaker and not the gambler because losses can be deducted from
income tax.
Unclear Trade
It is unclear whether X is a trader so we must look to the six badges of trade originally set out by the
Royal Commission in 1955: (1) what is sold; (2) length of ownership; (4) supplementary work; (5) why
the sale took place; (6) motive, plus business knowledge. Per CIR v Livingston [1926] and Clarke
[2000] the test requires an examination of all badges but they are only indicators, not decisive.
Analysis of Badges of Trade
Generally, if the subject matter is such that the purchaser cannot use it personally or derive an
income or pleasure from it, that points towards trading
o IRC v Fraser (1942); IRC v Reinhold [1953]: Where the taxpayer has bought an asset which is
far more than anything they can use individually or his friends and family there is "no pride
of possession" and is not for personal enjoyment, this is weighed in favour of trading view
(like the sale of whiskey for a profit in IRC v Fraser (1942)).
o Any form of organised activity designed to promote sale is evidence in favour of trading. The
large and skilled organisation of resale in Martin v Lowry (1927) for disposal of aircraft linen
to dispose of it in smaller quantities, including sales office; employment of staff; expert in
linen and advertising campaign pointed to trading due to the methods adopted; number of
operations and time occupied by the resale.
o Rutledge v IRC (1929): A one time purchase and sale of one million toilet paper rolls at a
substantial profit is trading
o Kirkham v Williams [1991]: Dual-purpose case
o Whether a transaction is trade depends in part on the purpose or purposes of the
taxpayer at the time of acquisition.
o Taxpayer (general dealer and contractor) acquired land and a mill to provide himself
with an office and storage space for his business. After purchase he unsuccessfully
applied for planning permission to build an agricultural worker's house on the land,
but was granted in 1980. Thereafter taxpayer built a four-bedroomed house on the
land, but sold it without living in it, realising a profit.
o CA held that the site had been acquired as a capital asset and so not open to
determine whether the purchase, development and sale of a site was trade (now
caught under CGT).
o In this dual-purpose case, held that the taxpayer's principal purpose for the
acquisition was use for business purposes and subsidiary purpose of developing and
selling the law was circumscribed and indefinite, so there is no basis that the land
was acquired as trading stock.
o Likely CGT now.
The longer the period of ownership, the more likely it is that the asset was not acquired for trading
purposes.
, Wisdom v Chamberlain [1968]: the short time the taxpayer held a silver bullion before
selling it was undeniably an adventure in the nature of trade as the whole object of the
transaction was to make profit.
Johnston v Heath (1970): If there is an intention at the time of purchase to sell quickly, that
supports the idea of trading and turning over assets for profit. Like in Johnston v Heath
(1970), the taxpayer had contracted to sell the asset before he had acquired it weighed in
favour of the trading view.
Turner v Last [1965]: A farmer purchased land with the intention of re-selling it, holding it
only for 1 year (short period of time to hold land) and sold it at the earliest possible
opportunity, pointed to trade.
Whilst a single transaction can amount to trade, repeated transactions are more likely to indicate
trading.
Rutledge v IRC (1929): 1 time purchase and sale of one million toilet paper rolls at a
substantial profit still was trade.
o But a one-off purchase of silver cutlery by a general dealer is much more likely to be a trade
transaction than such a purchase by a retired colonel: Marson v Morton.
Pickford v Quirke (1927): Similar Transactions (shares and sale of assets)
o A director of a spinning company took part four similar transactions involving the
buying of a company's shares and selling its assets at a profit. On their own, each
isolated transaction wouldn’t be considered trade (likely CGT), but as it was
repeated and systematic, they become a trader. The nature of the first transaction
must be determined in light of the acknowledge trading nature of the latter.
Leach v Pogson (1962): Similar Transactions (driving schools)
o The setting up of around 30 driving schools after the success of the first pointed to
trade by taking into consideration the subsequent transactions to throw light upon
the nature of the original transaction.
Marson v Morton [1986]: One-time investment not a trade deal; lack of knowledge, intention
and purpose
o Potato deals who had never dealt in land until they bought some with planning
permission on the advice of an estate agent and property developer with the
intention of making a "medium to long term investment" but no intention to use the
land. Matters left to the estate agent.
o In this case different minds could come to difficult conclusions given the possibility
of investment (but this is a capital transaction susceptible to CGT).
o Factors: Taxpayers did not know they were borrowing as such; property sold in one
lot without anything done to it to improve its value - investment not a trade deal.
The nature of the first transaction must be determined in light of the acknowledge trading
nature of the latter.
If work carried out on the subject matter makes it easier to sell or increases its price, thus increasing
profit, this points to a trade
CIR v Livingston [1926]: Conversion and repairs
o A ship repairer, blacksmith and a fish salesmen's employee purchase as a joint
venture a cargo vessel with the view to converted it into a steam-drifter and selling
it with extensive repairs and alterations to it, selling it at a profit
o They were unconnected in business and had never previously bought a ship, but this
is still trade because of the conversion and repair.
Cape Brandy Syndicate v IRC (1921): Breaking down of assets into smaller lots to facilitate a
sale points to a trading motive (recasking brandy) as it fundamentally changes the nature of
the product and it is no longer an "isolated transaction".
Taylor v Good [1974]: Someone who inherits property or buys it without the intention of
reselling is unlikely to be in trade
o Bought a house in auction with for its symbolic reference to his parents (who lived
there) and forethought of living there, but realised it was impracticable (wife
rejected it as a family home) and so did up the property and resold it. This later
formulation of an intention does not point to trade
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