CheckLists.Tax (beta)
E1. Trading transactions: general
EXISTENCE OF A TRADE
What amounts to a trade
- Nature of trade
- Trade is specific to a person, whereas a group may carry on a single business encompassing multiple distinct trades (York SD, §114).
Legislation:
Cases:
York SD Limited v. HMRC [2025] UKFTT 877 (TC), Judge Sukul;
HMRC manuals:
Commentary:
See also:
- Includes venture in the nature of trade
- For the purposes of the Income Tax Acts "“trade” includes any venture in the nature of trade" (ITA s.989).
- Previously referred to "trade, manufacture, adventure or concern in the nature of trade".
- "The Oxford Dictionary gives several meanings of “adventure”, but the most appropriate is that numbered 7: “A pecuniary risk, a venture, a speculation, a commercial enterprise.”" (Barry at 398)
- Barry stated that "in the nature of trade" did not qualify adventure, only concern.
- Adventure does not necessarily require that there must be risk (Heath at 922).
Whether operations involved are of the same kind as those characteristic of ordinary trading
- "I think the test, which must be used to determine whether a venture such as we are now considering is, or is not, in the nature of trade, is whether the operations involved in it are of the same kind, and carried on in the same way, as those which are characteristic of ordinary trading in the line of business in which the venture was made. If they are, I do not see why the venture should not be regarded as 'in the nature of trade,' merely because it was a single venture." (Livingston)
- Thus, a business that manufactures wagons, selling some outright and hiring out others may be carrying out a venture in the nature of trade when it comes to sell the wagons that were hired out (Gloucester Railway Carriage)
- See also J Bolson re ships bought and sold by a passenger transport business, which were held to be trading income.
Legislation: ITA 2007, s.989;
Cases:
IRC v. Livingston 11 TC 538 (Court of Session);
Gloucester Railway Carriage and Wagon Co Ltd v. CIR 12 TC 720;
Barry v. Cordy [1946] 2 All ER 396 (CoA);
J Bolson & Son Ltd v. Farrelly (1952) 34 TC 161, CoA;
Johnston v Heath [1970] 3 All ER 915, Goff J;
HMRC manuals:
Commentary:
See also:
- Relevant factors in general
General
- Badges of trade not a comprehensive account of all relevant matters, nor is any one decisive (Eclipse, §114).
- Badges provide common sense guidance, but still necessary to stand back and look at the whole picture and answer the statutory question (Eclipse, §114).
- FTT going through the badges one by one was "as one might expect" in Ingenious (§100).
- "Trade" commonly denotes operations of a commercial character by which the trader provides to customers for reward some kind of goods or services (Eclipse, §115).
- Trading involves a counter-party of some description, but it may or may not be helpful to seek to identify a customer (Eclipse, §116).
Frequency of transaction
- Fact that certain transaction done in ordinary course of business + done frequently does not show trading "you have to look at the transaction and see what its nature was" (Shell Company; BT Pension).
- Example given of a retail business acquiring new branches - they are acquired as capital rather than.
- But a transaction done once may not be trading, whereas if it is repeated it may be:
- "When, however, you come to look at four successive transactions you may hold that what was, considered separately and apart, a transaction to which the words "trade or concern in the nature of trade" could not be applied, yet when you have that transaction repeated, not once nor twice but three times, at least, you may draw a completely different inference from those incidents taken together. That is what the Commissioners have done." (Pickford)
Acceptance of risk for reward
- Speculation is an indication of trade - Eclipse §143.
- Acceptance of risk for reward is a relevant factor but not determinative. Also consistent with investment.
- "[the Commissioners] did not regard the legal characteristics of "the acceptance of a risk for reward", together with frequency, as pointing unequivocally to trade, and in my view they were right not to do so." (BT Pension).
- Extent of risk may be relevant (in BT Pension the degree of risk which the trustees ran for reward "was quite limited").
- Conversely, absence of risk is not necessarily inconsistent with trading (Eclipse, §143; Heath at 922).
Period of ownership
- Short period of ownership of asset sold points to trading.
- Consider whether the strategy was short-term opportunism (in BT Pension it was the "antithesis" of short-term opportunism).
- Buying asset T has already agreed to sell points to trading (Heath).
- But may be explained by other circumstances, as per the example in BT Pension scheme:
- "...a man who contracts to buy an attractive house for his own occupation but is unexpectedly presented, before completion, with an offer so extravagant that he cannot refuse it. At first glance his contract to purchase and rapid resale might appear to be an obvious adventure in the nature of trade. But closer investigation of the facts would show that appearances were deceptive."
Transaction in line with T's existing trade
- It is easier to find that a transaction is trading if T carried on an undoubted trade and the transaction is 'in that line of business' (Heath at 921).
Integration with a non-trading transaction
- "...a transaction can be closely integrated with another actual or intended transaction, and take its colour from it, even though the subsidiary transaction is not essential to the main transaction and even though the transactions are between different parties. That is illustrated by Imperial Tobacco v Kelly (HMIT) (1943) 25 TC 292, in which the forward purchase of dollars (from a bank) took its colour from the intended purchase of tobacco leaf (from producers in Virginia and other states in the United States) and was therefore a trading transaction." (BT Pension)
- On the facts of BT Pension, the trustees obtaining a share of commission from the lead underwriters was an integral part of the investment activity and took its colour from that activity.
- But subjective perception of whether it is a separate activity not relevant:
- "I do not think the Commissioners should have attached weight to the trustees' view that sub-underwriting was not a separate profit centre (that was a subjective perception) or to the absence of any separate business organisation for sub-underwriting (as the Solicitor-General said, they had all the organisation that they needed)." (BT Pension)
Significance of transactions in context of activity as a whole
- "The second aspect was the possibility of Eclipse 35 obtaining a share of Contingent Receipts and the activity on the part of Eclipse 35 to secure such a share. The FTT considered that this second aspect was in real and practical terms insufficiently significant in the context of Eclipse 35's business as a whole to lead to a proper characterisation of Eclipse 35's business as one of trade within the meaning of the tax legislation. In our judgment, that was a conclusion which the FTT were entitled to reach and, indeed, with which we agree." (Eclipse, §124)
Profitability
- No requirement that trade must be carried on with a view to profit (Hoey, §192).
- Example given in BT Pension of marketing consultants that run a supermarket solely to observe reactions of shoppers.
- "...liability is not avoided by evidence that the marketing consultants were not in the least interested in making a profit and that the whole enterprise was akin to a covert surveillance operation."
Likelihood of profit
- In Eclipse, the prospect of actually receiving the contingent receipts was "so remote as to make wholly unrealistic a conclusion that the entitlement to Contingent Receipts under the sub-licence of the rights in the Films gave the sub-licence the character of a trading transaction" (FTT finding noted by CoA at §125).
Organisation
- "Organisation cannot be decisive: as Lord Wilberforce said in Ransom (HMIT) v Higgs [1974] 1 WLR, 1613, `organisation' as such is not a principle of taxation: "All depends on what you organise."" (BT Pension).
Purpose/intention (relevant where other factors ambiguous)
- "If the legal or commercial characteristics of a transaction point unequivocally to trading, the trader's subjective purpose or motive cannot change the character of the transaction. But the character of the transaction may be ambiguous until resolved by reference to purpose or motivation." (BT Pension see also Iswera at 668).
Tax avoidance
- Relevant if transactions so affected/inspired by tax considerations that shape and character no longer a trading transaction (Hoey, §193; Ingenious, §198; Lupton at 647).
- "it is elementary that the mere fact that a taxpayer enters into a transaction or conducts some other activity with a view to obtaining a tax advantage is not of itself determinative of whether the taxpayer is carrying on a trade" (Eclipse, §117).
Legislation:
Cases:
Pearn v Miller [1927] 11 TC 610;
Pickford v. Quirke 13 TC 251 (CoA);
Iswera v. CIR [1965] 1 WLR 633 (UKPC);
Johnston v Heath [1970] 3 All ER 915, Goff J;
FA & AB Ltd v Lupton [1972] AC 634 (HoL);
Ransom (HMIT) v Higgs [1974] 1 WLR, 1613;
Marson v Morton [1986] 1 WLR 1343;
Trustees of BT Pension Schemes v. Clark [2000] EWCA Civ 55, Robert Walker LJ;
Eclipse Film Partners No.35 LLP v HMRC [2015] EWCA Civ 95;
Ingenious Games LLP v Revenue & Customs Commissioners [2021] EWCA Civ 1180;
Hoey v. HMRC [2022] EWCA Civ 656;
York SD Limited v. HMRC [2025] UKFTT 877 (TC), Judge Sukul;
HMRC v. GCH Corporation Limited [2026] UKUT 219 (TCC), Edwin Johnson J and Judge Greenbank;
HMRC manuals:
Commentary:
See also:
- Investment v. trading
- Frequency of transactions is not decisive
- "Frequency cannot by itself be decisive, since an investor may change his investments frequently (as the trustees did) without the investments losing their character" (BT Pension).
- Consider whether the strategy was short-term opportunism (in BT Pension it was the "antithesis" of short-term opportunism).
- Acceptance of risk for reward
- Is a feature of both trading and investment.
- Extent of risk may be relevant (in BT Pension the degree of risk which the trustees ran for reward "was quite limited").
- Integration with a non-trading transaction
- On the facts of BT Pension, the trustees obtaining a share of commission from the lead underwriters as sub-underwriters was an integral part of the investment activity and took its colour from that activity.
- Contingent receipt may be a potential additional return on fixed term investment:
- "The possibility of obtaining a share of Contingent Receipts did not give the business of Eclipse 35, looking at it as a whole, a trading character: having regard to the business as a whole, the right to Contingent Receipts was no more than a potential additional return on a fixed term investment." (Eclipse, §139)
Examples
- BT Pension:
- Sub-underwriting activity by pension trustees was habitual, organised, for reward, extensive and business-like but not trading .
- It was an integral part of the pension investment activity, risk taken was limited and the strategy was not one of short-term opportunism.
- Eclipse:
- Payment of money on terms that it would be repaid over 20 years and would produce a profit unrelated to commercial exploitation of any asset was investment (Eclipse, §123).
- Unlikely additional contingent receipt based on film performance was no more than additional potential return on investment (§139).
Legislation:
Cases:
Trustees of BT Pension Schemes v. Clark [2000] EWCA Civ 55, Robert Walker LJ;
Eclipse Film Partners No.35 LLP v HMRC [2015] EWCA Civ 95;
HMRC manuals:
Commentary:
See also:
- Land related
Trading
- Pearn v. Miller
- T bought on mortgage 5 tenanted properties over a 5-year period, repaired them and sold 2 of them to the tenants.
- Remitted to decide whether this was a trade/adventure in the nature of trade.
- Johnston v. Heath
- Entering into a contract to purchase land having already contracted to sell it to someone else was an adventure in the nature of a trade.
Not trading
Legislation:
Cases:
Pearn v Miller [1927] 11 TC 610;
Johnston v Heath [1970] 3 All ER 915, Goff J;
HMRC manuals:
Commentary:
See also:
- Exploitation of intangibles
- Ensign Tankers:
- Partnership between T and the subsidiary of an American film production company to produce and exploit a film already in the course of production by the production company was a trade.
- Substance of activity was to spend $32.5m towards the commercial exploitation of the film in which they had a 25% interest.
- Eclipse
- No trade where T did not pay for the production of the films or make a significant contribution towards their exploitation. Held to be equivalent to investment of money with a subsidiary (remote) possibility of a contingent return.
Legislation:
Cases:
Eclipse Film Partners No.35 LLP v HMRC [2015] EWCA Civ 95;
HMRC manuals:
Commentary:
See also:
Mutual trading
- Contributors to a common fund participating in a surplus not a profit
- There must be a common fund (MDU, §52(1))
- There must be complete identity between the contributors and the participators in the Surplus (MDU, §51)
- Complete identity not breached by owner of common fund being a separate legal personality, but must participate in surplus in same capacity as when contributing funds (MDU §52(3), (4))
- Complete identity relates to the class entitled to be benefit: actual individual benefits not required to be in proportion to contributions (MDU, §52(5))
- Activity carried on with outsiders unlikely to amount to mutual activity (MDU, §52(1))
- Paying contributions to a mutual defence union that takes out insurance is a common fund and a rebate to that fund is not taxable (MDU, §§61 - 64)
Legislation:
Cases: Medical Defence Union Limited v. HMRC [2021] UKUT 249 (TCC);
HMRC manuals:
Commentary:
See also:
COMMENCEMENT OF TRADE
- Deciding when a trade commences
Taking operational risk/exposure to risk of loss
- Mansell: entering into an option over land rather than negotiating it was commencement of trading (where trade was to get planning and sell on).
- "[94]...At that stage no operational risk has been undertaken: no obligation has been assumed which directly relates to the supplies to be made. Not until those negotiations culminate in such obligations or assets, and give rise to a real possibility of loss or gain has an operational activity taken place. Until then, those negotiations may be part of setting up the trade but they do not to my mind betoken its commencement."
- Wardle (2022) - Purchasing feedstock for a power plant was not sufficient to commence trading where the contract was conditional on construction of the power plant (§98).
- In property development, acquiring the land/property for development seems to be sufficient (see below).
- Acquiring and fitting out premises was not considered sufficient to be trading (as a restaurant) in Khan v. Miah.
- In Birmingham & District Cattle, preparatory works were considered neither to amount commencement of trading or business until raw materials for producing the product were received.
- Considered of doubtful correctness in Khan v. Miah, but that may be on the issue of "too narrow a view of the word 'business'".
Acquiring trading stock
- If a trade has not commenced, logically assets cannot be acquired as trading stock of the non-existent trade.
- Which would seem to mean that there is an appropriation to trading stock as and when the trade does begin (TCGA s.161), subject to the s.161(3) election.
Operating in a way designed ultimately to yield a profit
- "...it seems to me that a person cannot normally be said to be carrying it on within the meaning of s 11 if he is not yet in a position to start turning the business to account, or operating it, in a way that is designed (at least ultimately) to yield a profit." (Tower MCashback, §89)
- Not satisfied where T lacked the decision-making, financial or management structure for intended trade:
- “[95]…the present case falls clearly on the pre-trading side of the line because the SLA amounted to no more than a contract for the acquisition of plant at a time before any decision-making, financial or management structure for the intended trade had been put in place.”
- Although T entered into a software licensing agreement, there was no intention for the software to be exploited by itself or even by the LLP alone (see §§91 - 92).
Infrastructure set up
- In Wardle (2024), FTT held that the infrastructure set up did not need to be complete as long as it was in progress.
- In York SD Limited: "Without completing the essential steps necessary to begin generating electricity, such as constructing the plant or completing safety tests, and therefore without the necessary physical infrastructure in place, we do not consider the subsidiary was in a position to begin trading by the QBA deadline." (§106)
- Some trades require no infrastructure (e.g. personal trainer).
Legislation:
Cases:
Birmingham & District Cattle By-products Co Ltd v. CIR (1919) 12 TC 92, Rowlatt J;
Mansell v. HMRC [2006] STC (SCD) 605;
HMRC v. Tower MCashback [2008] EWHC 2387, Henderson J;
Wardle v. HMRC [2022] UKFTT 158 (TC);
Wardle v. HMRC [2024] UKFTT 543 (TC);
York SD Limited v. HMRC [2025] UKFTT 877 (TC), Judge Sukul;
HMRC manuals:
Commentary:
See also:
- Venture in the nature of trade commencement
- Trade is defined to include "any venture in the nature of trade" (ITA s.989).
- This raises the possibility that a "venture" (in the nature of trade) may commence prior to an actual trade.
- In relation to the existence of a partnership, the business venture clearly can begin prior to actual trading:
- "There is no rule of law that the parties to a joint venture do not become partners until actual trading commences. The rule is that persons who agree to carry on a business activity as a joint venture do not become partners until they actually embark on the activity in question. It is necessary to identify the venture in order to decide whether the parties have actually embarked upon it, but it is not necessary to attach any particular name to it." (Khan v. Miah)
- In a tax context, see Iswera:
- "If, in order to get what he wants, the taxpayer has to embark on an adventure which has all the characteristics of trading, his purpose or object alone cannot prevail over what he in fact does. But if his acts are equivocal his purpose or object may be a very material factor when weighing the total effect of all the circumstances."
- Logically to determine the nature of a venture at commencement, it is necessary to look at what is intended to be done in future, rather than only what has been done.
- Future plans taken into account in Cook v. Medway Housing Society in order to determine whether the business of a company was an investment business: "It is relevant to have regard to the actual activities carried on by the taxpayer at the relevant date, but if these are viewed without regard to the taxpayer's past history or future plans they may give only a partial and incomplete picture."
Legislation: ITA 2007, s.989;
Cases:
Iswera v. CIR [1965] 1 WLR 633 (UKPC);
Cook v. Medway Housing Society Ltd [1997] STC 90, Lightman J;
HMRC manuals:
Commentary:
See also:
- Land-related
Property development
- It appears that property development begins not later than the purchase of a property with intention to develop it
- "[491] ... I find that from 8 May 2003, Mrs Whyte was engaged in an adventure in the nature of a trade - she was actively engaged in constructing houses with a view to selling the Plots with the benefit of the partially constructed houses upon them..." (Whyte).
- "[21]...It is clear from the extensive case law in relation to what amounts to a trading activity as distinct from an investment activity, including the so–called "badges of trade", that, as a general proposition, the purchase of a single property with a view to profiting from the re–development and sale of that property can be sufficient to amount to a trade." (Eyre).
Buying + selling options over land
- Mansell - T began to trade when he when he entered into a formal option to buy an interest in land, being land that he considered might be developed and used as a motorway service station and which, it appears, he intended to sell on after getting permission for such a service station.
- The trade did not commence at the point at which T was negotiating contracts to buy such interests because, at that stage, no operational risk had been taken.
Legislation:
Cases:
Mansell v. HMRC [2006] STC (SCD) 605;
Whyte v. HMRC [2021] UKFT 270 (TC);
Eyre v. HMRC [2025] UKFTT 566 (TC);
HMRC manuals:
Commentary:
See also:
- Exploitation of intangibles
- Tower MCashback: entering into a software licensing agreement + preliminary marketing activities were preparatory steps rather than actually trading:
- “[91]…It is important to note that there was never any question of the code generation software being exploited by itself, or by LLP 1 alone. It was always envisaged that the system as a whole would be operated by MCashback and the LLPs, pursuant to Collaboration and Operating Agreements. Neither the software licensed to the four LLPs nor the software retained by MCashback could function independently, and the proposed business model was for the joint exploitation and development of the technology under the direction and management of a committee with members appointed both by the LLPs and by MCashback…
[92]…All it had done was to enter into a contract to acquire an asset which it intended to use in due course for the purposes of a trade of exploiting the licensed software, on terms still to be agreed with MCashback and its fellow LLPs…”
- Suggestion in Khan v. Miah was that film production trade commences when the cameras start to roll.
Legislation:
Cases:
HMRC v. Tower MCashback [2008] EWHC 2387, Henderson J;
HMRC manuals:
Commentary:
See also:
RESIDENCE AND LOCATION OF TRADE
- Routing trading income through artificial offshore structure to rely on treaty is abusive
GAAR example D12.
Legislation:
Cases:
HMRC manuals:
Commentary:
See also: