#15662 - Business Tax - Tax Law

Problem Question guide – Business Tax

Structure:

1. Is the taxpayer ‘trading’?

2. Is the sum a ‘trading receipt’? (Is it a trading receipt or something else? Is it a capital or income receipt?)

3. Can the taxpayer claim expenses? (Is it a capital or income expense? Is it wholly and exclusively for the purposes of the trade?

1. Is the taxpayer ‘trading’? (s 5 ITTOIA)

‘Badges of trade’ in the 1945 Royal Commission list: subject matter (certain types of property such as commodities or manufactured articles are normally the subject of trade); length of period of ownership (property meant to be realized within a short time after acquisition is normally the subject of trade); frequency of transactions; supplementary work; circumstances of realization (if there is some explanation such as a sudden emergency, this negatives the idea that any plan of dealing or trade prompted the original purchase); motive.

Difficulty in determining, and guidelines on, whether there is ‘trade’ expounded on in Marson v Morton:

• T owned a company which traded in potatoes. He bought land, intending to make a capital profit and sell it in two years. He trusted the real estate agent who advised him; the real estate agent told T to sell the land. The question was whether T was engaging in trade – the General Commissioners argued that as the real estate agent was not instructed to sell at any particular price or time, the transaction was more like an investment in stocks and shares.

• Sir Nicholas Browne-Wilkinson referred to these cases as a ‘no-man’s-land’, and he did not see it fit to interfere with the General Commissioner’s decision.

• The case also provides its own ‘badges of trade’:

• (1) That the transaction in question was a one-off transaction

• (2) Is the transaction in question in some way related to the trade which the taxpayer otherwise carries on?

• (3) The nature of the subject matter: Was the transaction in a commodity of a kind which is normally the subject matter of trade and which can only be turned to advantage by realization. For example, a large bulk of whiskey or toilet paper is essentially a subject matter of trade

• (4) Was [the transaction] carried through in a way typical to the trade in a commodity of that nature? (5) What was the source of finance of the transaction? If money was borrowed that is some pointer towards an intention to buy the item with a view to its resale in the short term; a fair pointer towards trade

• (6) Was the item which was purchased resold as it stood or was work done on it or relating to it for the purposes of trade. If there was such work done, that is again a pointer towards the transaction being in the nature of trade.

• (7) Was the item purchased resold in one lot as it was bought, or was it broken down into smaller lots?

• (8) What were the purchasers' intentions as to resale at the time of purchase? If there was an intention to hold the object indefinitely, albeit with an intention to make a capital profit at the end of the day, that is a pointer towards a pure investment as opposed to a trading deal. On the other hand, if before the contract of purchase is made a contract for resale is already in place, that is a very strong pointer towards a trading deal rather than an investment. Similarly, an intention to resell in the short term rather than the long term is some indication against concluding that the transaction was by way of investment rather than by way of a deal. However, as far as I can see, this is in no sense decisive by itself.

• (9) Did the item purchased either provide enjoyment for the purchaser or pride of possession or produce income pending resale. If it did, then that may indicate an intention to buy either for personal satisfaction or to invest for income yield, rather than purely for the purpose of making a profit on turn.

Important badges:

1. Purpose of profit

• In Religious Tract & Book Society, a religious order was sending out colporteurs, alongside a profitable bookstore trade. The colporteur operation made a loss. The Commissioners distinguished the colportage from the bookstores, and held that it was not a trade as it was not carried out in a commercial manner. The losses from the colportage could not set off the profits from the bookstore.

• Hence, an activity which invariably makes a loss as it is run in an uncommercial manner is not a trade. Instead, the colportage activity was a charitable one.

2. Motive for acquisition, Purpose

• The acquisition of an asset with the hope of making a profit does not inevitably result in trade; an investment would also be for profit. The time at which resale is foreseen is of greater importance.

• In Turner v Last, the appellant purchased two fields, and intended to resell them for profit. He also farmed land, and contended that this transaction was solely for that farming, and that the profit was a capital accretion. The court held that the appellant purchased with the intention to resell as soon as he could, and hence the profit was made as an adventure in trade. [It is irrelevant if the activities of the taxpayer involve using land as capital, if the isolated transaction is an adventure in trade]

• In Iswera v CTT, the appellant wished to reside near the school where her daughters were attending, and agreed to purchase land near the school. She bought the land, and divided it into sub-plots which she sold for profits. It was held that the appellant’s dominant view was to profit and her actions were suggestive of trading, despite the case being borderline. However, it was clarified that in most cases, the appellant’s object or purpose cannot alone prevail over what he in fact does; it is only if his acts are equivocal that his purpose may be a material factor. Lord Reid also considered it important that ‘It was an essential part of her plan that the greater part of it should immediately be sold to sub-purchasers because without the money paid by them she could not have found the money to pay the balance due to the vendor. No doubt she acquired the part of the site which she retained as a capital investment, but in order to acquire it she had to buy, divide, and immediately resell the rest of the site.’ [The emergent rule is that corollary intentions regarding the land (e.g. to live near her daughter’s school) did not negate an intention to resell the land as an adventure in trade].

• In Kirkham v Williams, however, the purpose of the development and sale of the site was severely circumscribed and subsidiary to another purpose; it was not an adventure in the nature of trade. In the case, T worked as a general dealer. He purchased land and acquired planning permission for the erection of a dwelling house. He sold the land and the house and moved into a farm. The General Commission argued that the house and site were built primarily as an office for his dealing and contracting, and that the purchase, development and resale of the site was in the nature of trade. On appeal, the court held not to be so as ‘it is clear that the taxpayer's subsidiary purpose of developing and selling Havannah Mills could not have been implemented concurrently with his principal purpose of providing office and storage space for his business. But he would not have been able to sell the site unless and until he had been able to provide himself with suitable office and storage space elsewhere, an event which might not have occurred for some time. And so the taxpayer’s ‘purpose’ or ‘object’ or ‘intention’ in regard to the development and sale of the property was severely circumscribed, its implementation indefinite in point of time’. [Comparing Kirkwood and Iswera, it is significant that in Iswera, the trade (sale of smaller plots) was necessary in order to achieve the subsidiary purpose of retaining the main site, but in Kirkwood, the sale of the land could only take place if it was first used as an office, and hence T’s purpose as to the development and sale was circumscribed]

• Recent dicta indicating that the purpose of the transaction is increasingly important: New Angel Court Ltd v Adam. In that case, ‘It is plain fromCoats v Arndale andReed v Nova Securities Ltdthat such an investigation is required. As Lord Templeman made clear in theReedcase not only must the asset which has been transferred be “of a kind which is sold in theordinary course of the company's trade” but it must have been acquired by the taxpayer “for the purposes of that trade with a view to resale at a profit”. It is therefore necessary to consider the purpose of the transfer. Was it for the purposes of the taxpayer's trade? Or, to put it another way, did acquisition of the asset havea trading purpose?’

3. Not income yielding

• If the object yields income, the general rule is that it is an investment rather than trade.

• However, Marson v Morton stressed that it was no longer self-evident that land could not be an investment unless it produced income: ‘Since the arrival of inflation and high rates on tax on income new approaches to investment have emerged putting the emphasis on the making of capital profits at the expense of income yield’.

• Profits on a sale of property which produces income may nonetheless be taxable as trading profits depending on the circumstances of the case.

4. Processing/supplementary work

• The alteration of an asset might suggest that there is a venture in the nature of trade e.g blending of brandy in Cape Brandy Syndicate v IRC.

5. Realisation

• ‘Some explanation, such as a sudden emergency or opportunity calling for ready money, negatives the idea that any plan of dealing prompted the...