HMRC could withstand cases of a hobby amounting to trading, particularly if losses have been incurred.
It is reasonably common for an individual to have a ‘sideline’ activity to their major line of work. The question develops whether that task amounts to a profession. The tax office and Revenue and Customs (HMRC) commonly argue that the person’s “sideline” is a taxed profession.
Putting on the badge( s).
However, in some cases individuals (as opposed to HMRC) compete that their activity is a taxed trade (rather than a financial investment task or leisure activity). The activity may be loss-making, and the individual may declare that the task amounts to a trade, with a view to getting ‘sideways’ loss relief versus their various other income.
Unsurprisingly, HMRC checks out lots of such sideways loss alleviation cases, for testing the presence of a profession (i.e., no profession = no trading loss). Sadly, there is very little legal guidance on the definition of ‘trade’.
The ‘badges of profession’ can in some cases be handy. These were first established by the Royal Commission for the Taxes of Profits and Income in 1955, using previous case law regarding what comprises a trade. Ultimately, a total of 9 badges were determined (Marson v Morton Ch D 1986, 59 TC 381).
HMRC’s Business Income Handbook (at BIM20205) details the ‘badges’ as follows:
1. Profit-seeking intention.
2. The number of transactions.
3. The nature of the possession.
4. Presence of comparable trading deals or rate of interests.
5. Changes to the asset.
6. The means the sale was carried out.
7. The source of financing.
8. Period of time between acquisition and sale.
9. Method of purchase.
Nonetheless, case law suggests that the badges of trade need to not be used as a checklist. HMRC’s assistance states: “The weight to be connected to each badge will rely on the accurate circumstances”.
Trading or investing?
The nature of tasks such as share deals by people increases the problem of whether they constitute trading or investment; the last usually falls within the resources gains tax regime, so income tax relief as trading losses is unavailable.
The taxpayer put most of his inheritance in a financial investment account, where financial investment choices were made by fund managers. He additionally returned to making share deals and also asserted trading loss alleviation in regard of them. HMRC contended that the activities did not amount to a trade or that if they did, the trade was not performed on a commercial basis.
The First-tier Tribunal noted that the ordinary trades through under testimonial phoned number simply over one weekly, with a maximum of 9 sell a solitary week as well as numerous weeks without any trades. In addition, the moment invested by the taxpayer (1-2 hours each day) did not sustain the opinion of trading. His appeal was rejected.
Practical tip.
As indicated in Henderson, even if it is approved that there is a profession, if the profession is not carried out on a commercial basis for the realisation of profits, sidewards loss relief will not be readily available.
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