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HMRC internal manual

Business Income Manual

Meaning of trade: badges of trade: reasons for sale

The Royal Commission on the Taxation of Income and Profits in 1955 (see BIM20201) suggested that circumstances that were responsible for the realisation should be considered. Their report said: ‘There may be some explanation, such as a sudden emergency or opportunity calling for ready money, that negatives the idea that any plan of dealing prompted the original purchase’.

There are few clear examples in case law of this principle being used to support a claim that a person was not trading. However, in West v Phillips [1958] 38TC203 a builder sold houses which he had admittedly held as an investment for many years. He was assessed on the profits from the sales as trade profits and the Commissioners found that the houses had changed their character to trading stock when the builder set up a sales organisation to dispose of them.

The court found that this inference of a change of intention was unjustified. It paid insufficient regard to the circumstances that forced him to sell:

  1. he owed large amounts of money to his bankers and building society which could not be found out of the rental income;
  2. rent control made the lettings uneconomic; and
  3. there were substantial tax arrears to be met.

By way of contrast, in Mitchell Bros v Tomlinson [1957] 37TC224 a change of intention was found to be justifiable, despite claims that the sales of former investment properties had been motivated by lettings becoming uneconomic. That is, an increase in repair costs and the need to realise the partnership on the death of a partner. However, in this case there was a great deal of other evidence that a trading intention had been established well before the partner died.