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Sole traders & the self-employed pdf

   

Added on  2021-04-27

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Trading income•Self-employed/sole traders: individuals whose profits arise from a trade, profession or vocation•What constitutes a trade? This has been reviewed several times by the Courts.•In June 1955, the Royal Commission on the Taxation of Profits and Income used these judicial decisions to establish what they regarded to be the following main criteria in identifying the 'badges of trade': -1.The subject matter of the transaction; there are 3 reasons for purchasing an asset:1.For personal use – not subject to tax2.As an investment – capital in nature and not subject to income tax3.For resale at a profit (that constitutes a trade): therefore subject to income tax-

Badges of trade2.The length of the period of ownership: the longer the period between date of acquisition and date of disposal, the more likely the transaction will not be treated as trade.3.The frequency or number of similar transactions by the same person; usually the more transactions there are, the more likely that they will be regarded as trading activities.E.g. An individual acquired 1,000,000 toilet rolls and resold them at a profit. In this case, he was judged to have made a trading profit and single transaction was enough. One could argue this was an investment but usually to be considered as an investment, goods must be either income producing (such as land or shares) or liable to be held for aesthetic reasons (such as works of art)

Badges of trade•4.Supplementary work and marketing; For example, in CIR v Livingston and Others [1926] 11TC538 a sea vessel was purchased as a joint venture by three individuals. The Lord President stated, at pages 542 and 543:•“The Respondents began by getting together a capital stock sufficient (1) to buy a second-hand vessel, and (2) to convert her into a marketable drifter. They bought the vessel and caused it to be converted at their expense with that object in view, and they successfully put her on the market. From beginning to end, these operations seem to me to be the same as those which characterise the trade of converting and refitting second-hand articles for sale... The profit made by the venture arose, not from the mere appreciation of the capital value of an isolated purchase for resale, but from the expenditure on the subject purchased of money laid out upon it for the purpose of making it marketable at a profit. That seems to me of the very essence of trade”.'

Badges of trade•5.The circumstances that were responsible for the sale; a forced sale to raise cash for an emergency is an indication that the transaction was not of a trading nature.•6.Motive; intention to profit indicates trading. For e.g, an individual hedging against devaluation of sterling by purchasing silver bullion. On resale, a profit arises and is regarded as trading profit since the motive for the transaction was to make a profit in sterling terms.•7. Method of finance: If the purchaser has to borrow money to buy an asset such that he has to sell that asset quickly to repay the loan, it may be inferred that trading was taking place.

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