SELF-EMPLOYMENT: BADGES OF TRADE
Trading encompasses income from a trade, profession or vocation.
It is important to consider whether a trade is being carried on because the disposal of an asset might
either result in a trading profit or a capital gain. This is particularly relevant now that the rates for Capital
Gains Tax are lower than the Income Tax rates.
The legislation gives quite a wide definition of ‘trade’ so deciding what constitutes a trade has been left to
the courts. From this case law several tests have evolved which identify the main criteria of a trade and
it is these ‘badges of trade’ which help determine whether a person is trading.
Profit-seeking motive An intention to make a profit supports trading, but by itself is
Salt v Chamberlain [1979] 53 TC 143 not conclusive.
Evidence that the sole object of acquiring an asset is to re-
sell it at a profit, without any intention of holding it as an
investment, points to the carrying on of a trade.
Frequency or number of similar transactions Systematic and repeated transactions will support ‘trade’.
by the same person Single, isolated transactions can amount to a trade, but this
CIR v Fraser [1942] 24 TC 498 is generally difficult to show (the transaction would have to
be shown to be a venture in the nature of trade).
The nature of the asset Is the asset of such a type or amount that it can only be
Rutledge v CIR [1929] 14 TC 490 turned to advantage by a sale, or did it yield an income or
give ‘pride of possession’ (for example a picture for personal
enjoyment)?
Connection with existing trade If there is an existing trade, then a similarity to the
Lynch v Edmondson [1998] STC SCCD 185 transaction under consideration may be a pointer to that
transaction having a trading character.
Changes to the asset Was the asset repaired, modified or improved to make it
CIR v Livingston & Others [1926] 11 TC 538 more easily saleable or saleable at a greater profit?
The way the sale was carried out Was the asset sold in a way that was typical of other trading
CIR v Fraser [1942] 24 TC 498 organisations?
The source of finance Where money is borrowed, and the sale of the asset is
Wisdom v Chamberlain [1968] 45 TC 92 linked to the repayment of the loan, this often indicates an
intention to re-sell in the short term, an indication of trading.
Length of ownership Assets that are the subject of trade will normally, but not
Johnston v Heath [1970] 46 TC 463 always, be sold quickly. Therefore, an intention to resell an
asset shortly after purchase will support trading. However,
an asset which is to be held indefinitely is much less likely to
be a subject of trade.
Method of acquisition An asset that is acquired by inheritance or as a gift is less
Taylor v Good [1974] 49TC 277 likely to be the subject of trade.
The badges will not be present in every case and of those that are, some may point one way and some
the other. Also, the presence of a particular badge is unlikely by itself to be conclusive either way and
the weight attached to each badge will depend on the precise circumstances.
The approach by the courts in using the badges of trade has been to decide questions of trade on the
basis of the overall impression gained from a review of all the badges.
This factsheet contains general advice only based on our understanding of current legislation. It should not be relied on as a basis for
any decision or action. Professional advice specific to the situation should always be obtained.
UPDATED: March 2016 www.wardgoodman.co.uk
