Many people have hobbies that generate money, such as buying and selling items at car boot sales or on eBay. It may seem paradoxical that some individuals seek to claim that an activity is a taxable trade, rather than a non-taxable hobby. However, this appears to be becoming increasingly common. In particular, an individual may contend that loss-making activities amount to a trade so that relief for trading losses can be offset against the individual’s other income (under ITA 2007, s 64), often referred to as ‘sideways loss relief’).
Is there a trade?
Not surprisingly, HM Revenue and Customs (HMRC) tend to examine many such sideways loss relief claims. HMRC may contend that there is no trade. If there is no trade, there can be no trading loss. Unfortunately, there is very little guidance on the meaning of ‘trade’ in the tax legislation. A trade is simply defined (in ITA 2007, s 989) as including ‘any venture in the nature of trade’. The lack of statutory guidance on the meaning of ‘trade’ has resulted in extensive case law over the years.
The ‘badges of trade’ can sometimes be helpful. These were first established by the Royal Commission for the Taxation of Profits and Income in 1955, using previous case law about what constitutes a trade. Subsequently, in Marson v Morton Ch D 1986, 59 TC 381, a total of nine badges were identified. HMRC guidance (in the Business Income manual at BIM20205) lists the badges as follows:
1. profit-seeking motive;
2. the number of transactions;
3. the nature of the asset;
4. existence of similar trading transactions or interests;
5. changes to the asset;
6. the way the sale was carried out;
7. the source of finance;
8. interval of time between purchase and sale; and
9. method of acquisition.
However, Marson v Morton and other case law (Salt v Chamberlain Ch D 1979, 53 TC 143) indicates that the badges of trade should not be used as a checklist to conclude whether a trade does (or does not) exist. The above HMRC guidance also urges caution about relying too heavily on the badges of trade.
Is it commercial?
Even if it is accepted that there is a trade, HMRC will sometimes argue that the trade is not being undertaken on a commercial basis, and/or with a view to the realisation of profits of the trade. Sideways loss relief is not available in those circumstances (ITA 2007, s 66).
A number of recent cases have considered whether a trade was carried on, and if so, whether the sideways loss relief restriction in s 66 applied:
- Ali v Revenue & Customs [2016] UKFTT 8 (TC) – An individual (also a successful pharmacy business owner) who bought and sold listed shares with a view to profiting from short-term price movements was held to be carrying on a trade, and the First-tier Tribunal held that it was commercial (such that the above loss relief restriction did not apply);
- Anthony & Anor (Re T J Charters LLP) v Revenue & Customs [2016] UKFTT 9 (TC) – A trade of chartering a vessel for day charters was held not to be commercial, and the trade was not carried on with a view to the realisation of profits in the relevant periods;
- Patel v Revenue & Customs [2015] UKFTT 13 (TC) – The tribunal held that an individual’s separate trades of supplying ingredients and running cookery workshops and selling art and photographic images of Indian culture never got beyond being a hobby, and sideways loss relief was denied; and
- McMorris v Revenue & Customs [2014] UKFTT 1116 (TC) – An individual’s activities in purchasing a half share of a racehorse and paying towards its training costs with a view to selling the horse later at a profit did not amount to a trade, and was not operated on a commercial basis for sideways loss relief purposes.
Practical Tip:
HMRC’s guidance (at BIM20050 and following) includes extensive commentary on the meaning of ‘trade’. Whilst HMRC’s guidance does not carry the force of law, it is potentially useful to be aware of HMRC’s view and its general approach in establishing whether or not a trade exists. A detailed business plan may be helpful in establishing that a trade is being carried on commercially, and with a view to making profits. For example, an unwritten business plan was held in the Ali case to be the decisive factor in the taxpayer’s favour.
The government announced in Budget 2016 a new allowance of £1,000 for trading (and property) income from April 2017. This will be particularly helpful for those whose trading activities are on the smallest scale.
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