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HMRC internal manual

Business Income Manual

Meaning of trade: general: fiscal purpose

The cases concerned with the meaning of trade have usually considered whether the transactions in question had the outward characteristics of trade. There is, however, another line of cases starting with Lupton v FA & AB Ltd 47TC580 and running through to Ensign Tankers (Leasing) Ltd v Stokes 64TC617 that establishes a parallel and equally important principle. This is that transactions undertaken solely for fiscal purposes (to get a tax advantage) are not trading transactions, even if the outward characteristics of trading are present. Thus, for example, in Overseas Containers (Finance) Ltd v Stoker [1989] 61TC473 at page 536, the Vice Chancellor said:

‘The meaning of ‘trade’ is not defined by statute but has been explained as meaning “operations of a commercial character by which the trader provides to customers for reward some kind of goods or services”: Ransom v Higgs [1974] 1 WLR (50TC1) at p1600 per Lord Reid. The commercial character of a transaction is normally determined objectively by the nature of the transaction itself, i.e. is it a transaction of a kind similar to transactions of the same nature in the commercial world and carried out in a similar way?: Livingston v. Commissioners of Inland Revenue 11TC538 per Lord Clyde at p542. However, it is established by authority that, in addition to such outward badges of trade, the transactions must have a commercial purpose: F.A. and A.B. Ltd. v Lupton [1972] AC 634 (47TC580); Coates v Arndale Properties Ltd. [1984] 1 WLR 1328 (59TC516).’

Although the Vice Chancellor also held, at page 538, that when considering purposes in a group context it is legitimate to look at the purposes of the group as a whole, this was rejected by Parker LJ in the case of New Angel Court v Adam [2004] 76TC9. When considering the purpose for which a transaction was undertaken, one should look at the perspective of the company in question. Even in a group context, the transaction should be viewed from the perspective of the individual company.