Understanding Badges of Trade and Taxation in the UK

Taxation

TABLE OF CONTENTS
Introduction......................................................................................................................................3
Question 1........................................................................................................................................3
Question 2........................................................................................................................................5
(a).................................................................................................................................................5
(b).................................................................................................................................................6
Question 3........................................................................................................................................6
(a).................................................................................................................................................6
(b).................................................................................................................................................7
(c).................................................................................................................................................8
Question 4........................................................................................................................................9
(a).................................................................................................................................................9
(b).................................................................................................................................................9
(c).................................................................................................................................................9
(d)...............................................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Income tax is charged on the taxable income of the assesse, and this income is computed after
considering the allowances, disallowances, deductions and exemptions provided by the UK
government (Devereux, Liu, and Loretz, 2014). The present study is about the understanding of
badges of rules, which assist in determining whether the particular transaction comes within the
scope of the trading activity. Along with this, difference between the tax evasion and tax
avoidance is also stated in this study. Moreover the requirement of the registration under the vat,
payment of vat liability and manner of filing the return of vat by the person is also stated.
QUESTION 1
In the United Kingdom the income tax is levy on profit from business, profession or by the
vocational activities (Jenkins, 2016). With respect to this, HM revenue and custom (HMRC)
defines the nine badges of trade, therefore if any activity carried by the person fulfil the
condition of the badges of trade, then it will regarded as a trading activity and the tax will levy
on the profit earned by that activity.
Badges of trade is described as below-
 If the person purchases the asset and sold within the short term period, then it is
considered as the person purchase the asset with the objective to sale the asset at a profit.
Therefore it is considered trading activity (Garbett, 2016).
 If the organization is set up in such a way, by which the person carried out the activity,
even if only some part of this activity related with them is commercial then also it is
regarded as trading activity. In the case of The Cape Brandy Syndicate, Syndicates of

chartered accountants refined brandy. Since the organization argues that they sold only
that much brandy which is left after their consumption. But the department argues that,
the organization had set up special phone line, carried the promotion activity and separate
information desk, therefore all the activities are considered under definition of trading
activity.
 The purpose of the buying and selling the asset is also plays a very important role in
determining whether the transaction is considered as a trading activity or not (Garbett,
2016). Even if the asset is acquired as a gift or in inheritance, but the person who
acquired the asset, sell the asset by making the advertisement and earn the profit on them.
Then it is regarded as trading activity.
 Any transaction undertaken by the person with the intention to making the profit from the
same is regarded as a trading activity. However existence of the profit does not make any
impact, if the objective or the intention is present then only it is the trading activity.
 The nature of transaction carried out by the person is also evaluated for ascertaining the
trading activity. Even if the single transaction of the buying and selling activity leads to
the trading profit then also it will be covered under trading activity. In the case of
“Rutledge v CIR” the tax payer purchased one million rolls of toilet paper in one
transaction and also sold all the rolls in single transaction (Garbett, 2016). It is termed as
trading which is in the nature of adventure.
 For promoting the sale, if the person purchased the asset and then made the changes in
the asset which result in endorsing and selling the asset. Then this activity is regarded as
a trading activity.