A side by side comparison of badges of trade between circumstances pointing to trade or investment.
HMRC and taxation sources on the interpretation of badges of trade are many and extensive. With a view to summarising them and providing a quick reference concerning the most frequently considered badges of trade, we have prepared a side by side comparison between circumstances pointing to trade or investment.
Badges of trade tests should be considered in their entirety and meeting one test without considering others is not conclusive.
Acquisition of investment was to realise a profit and that intention is based on facts rather than professed declaration
There is a commercial motive of the activities undertaken, irrespectively of whether profit or loss ultimately arises
Profit making is not a conclusive pointer and other badges of trade have to be present to determine that it is trade
Speculation does not count as intention
Acquisition may or may not have been made with a view to realise profit but there are no or hardly any other sufficiently significant badges of trade to suggest that it is trade
Acquisition of shares was speculative whereby a risk that the transaction(s) may not be as profitable as expected (or may indeed give rise to a loss) was recognised and the project nevertheless pursued
Profit making motive was not the main motive
The sole motive of trade was fiscal– to get a tax advantage (generate a loss in order to offset against profits and avoid tax) Overseas Containers (Finance) Ltd v Stoker  61TC473 page 536C. There was no other commercial purpose
Number of transactions
Generally multiple, frequent transactions are likely to indicate trade, whilst isolated transactions are likely to be investment. However, it is possible that this broad rule will not be conclusive. The nature of profit generated (capital or income nature) needs to be considered in this instance.
Many systematically repeated transactions at high frequency showing a continuous activity
Single transaction undertaken as adventure in trade, including speculative adventure which generates an unexpected profit which is of income, not capital nature. For example, a one off purchase of a commodity, at a volume which is in excess of what one would need for personal purposes, and re-sale of this large quantity of commodity. CIR v Fraser  24TC498
Scarce number of transactions, where the motive to set up a trade was not at first present but formed later (by the time subsequent transactions arose). In this instance later transactions are taken into account in assessing the nature of the first.
For example in Leach v Pogson  40TC585 an individual set up a driving school which was later sold. By the time the driving school was sold an intention had arisen to develop a trade of setting up and selling driving schools.
A single or scarce number of transactions, including those which were undertaken as a speculative adventure which generated a profit of capital nature
Repeated but irregular transactions in different types of property spread over several years
Nature of asset and how it generates income
Typical trading commodity
Assets which do not produce income until they are sold point towards trade
Financial asset - Generally assets which produce income (dividends on shares)
Assets which produce no income as they are designed so that no or little yield is generated during their life and the major part of the income is realised on sale (bonds, some stocks)
Is the asset for personal enjoyment?
Asset is not used for enjoyment and of no use to the owner unless sold
Wisdom v Chamberlain  45TC92
Asset used for enjoyment (pride of possession) - there is a presumption that there is no trade even if acquired in the hope or expectation of value appreciation, unless there are clear indications that it was acquired in order to carry on a trade
High quantity purchased indicative of trade for a profit (see: Number of transactions above)
CIR v Fraser  24TC498
Low quantity indicative of personal use
Connection with existing trade
Transaction is similar to those already undertaken
Transaction undertaken by someone and is similar or related to his existing trade
Purchase and sale of asset which is unrelated and dissimilar to any activity undertaken to date
Organisation of operations and sale transaction
Transaction, even a one off, is carried out in the same manner as it would be carried out by ordinary traders
There is absence of any typical of trading activity such as establishing a sales office, employing people, advertising
Link to the purpose for which the entity was formed
Transaction is related to the purpose for which the organisation was formed
Activity is incidental or unrelated to the purpose for which the venture was started
Interval of time between purchase and sale
Sale takes place soon after purchase, even if there is no admitted or demonstrable intention
There was an intention to sell quickly
Asset was contracted to be sold before it was acquired
There was an intention to hold the asset for a long term investment, even if it was actually sold soon after purchase due to changing circumstances
Way and purpose of the acquisition of the asset
Asset is obtained as a gift or inherited but it can be demonstrated that it became an item of stock (intention to trade was formed later and circumstances point to it)
Work was done to the asset in order to enable it being sold
Asset is gifted or inherited and is not resold as part of a trade