Corporate Taxation: Badges of Trade, Allowable vs Non-Allowable Deductions, Income Tax Act 1995

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Corporate Taxation

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Question 1: Badges of Trade
A number of tests has been developed by the court and the legal authority to justify whether a
person is trading or the person is buying and selling goods for its own uses are known as the
badges of trade. The ten tests which has been developed are explained in the following
section:
Profit seeking motive
It is very important to identify the nature of transaction when a person enters in to it. If the
person has a motive to earn profit from the transaction, then the concept of tax payment
arises.
Frequency and number of similar transactions
When an action is repeated more than one time it is considered as a trade and thus the person
has to pay tax. Taking in to consideration the case of Pickford v Quirke an individual
purchased a mill for trading. Since, the condition of the mill was not good the individual
stripped each item and sold it for more than one time and thus made a significant profit.
Nature of Asset
When the purpose of purchase of an asset cannot be justified other than for the resell then it
should be labelled as a trade practice. Taking in to consideration the Rutledge v CIR case a
taxpayer purchased 1 million toilet rolls. That person sold those rolls to another and made a
huge amount of profit before returning to his own country. This case of transaction was not
considered for own use. This case can be considered as a profit seeking motive (Protection,
C., Trading Law).

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Existing trade connection
If a person is doing a service and side by side does a business which is not linkable then it has
to be looked at whether it is a trade practice or not. A person who is a finance manager of a
company and simultaneously sales medicines fall in to such category.
Land transactions
It should be seen whether an individual is investing in lands or dealing with lands. If the
person is dealing with land, then it has to be considered as trading. The case of Marson v
Morton falls under this category. An individual purchased land for an intention to invest.
Then the owner intended to increase the value of the land so he/she applied for the
commission of planning. This condition was looked at and it was concluded that since the
documented intention was only for investment therefore it is not a trading practice.
In the case of Kirkby v Hughes one builder bought a run-down building. He then repaired the
house and sold it in a good profit margin. The court said that it falls under the badges of trade
because the motive was profit seeking.
Share dealing
Investing in shares is not considered as trading whereas dealing is considered as trading. The
case of Salt v Chamberlin said that if any individual buys and sells shares for numerous times
it will fall under the badges of trading and if it is done by any enterprise then the matter will
be looked at.
Existence of a sales organization
The case of “The Cape Brandy Syndicate” the company used to distill more and after
drinking the surplus was being sold. HMRC considered this as trading because they
established phone lines, brochures and advertised their brandy.