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HMRC internal manual

Business Income Manual

Meaning of trade: badges of trade: intention - unequivocal and equivocal transactions

Case law has drawn a distinction between ‘equivocal’ and ‘unequivocal’ transactions, as in Iswera v CIR [1965] 1WLR668 (a Ceylonese Privy Council case), copies of which are available from BAI - Business Profits Team). This case concerned land, but the principle is equally relevant to all assets. The Iswera case was considered in Kirkham v Williams [1991] 64TC253 and, at page 280, Ralph Gibson LJ said:

‘I assume that the transaction is to be regarded as equivocal in the sense of the phrase used by Lord Reid in Iswera. I understand that sense to be that, upon analysing objectively what the taxpayer did at the time of the acquisition and in subsequent dealing with the land, his acts are consistent with the land having been acquired as a capital asset, which was subsequently sold to best advantage, and also consistent with the site having been acquired as a trading asset which was subsequently applied to that purpose. On that assumption the taxpayer’s purpose or purposes at the time of acquisition may be a very material factor when weighing the total effect of all the circumstances.’

There are no hard and fast rules as to what makes a transaction equivocal. Nourse LJ, also in Kirkham, thought an equivocal case was a case in which the facts, where viewed on their own, did not tell you whether the land acquired was acquired as trading stock or as a capital asset.

In ‘unequivocal’ cases the person’s own statement of their intentions is not conclusive (Iswera). However, in equivocal cases the person’s stated intention may, before the Tribunal, constitute evidence that they must accept, unless we can present sufficient counter evidence of a trading intention. This is a function of the badges of trade. Where the transaction is equivocal the taxpayer’s motive(s) for entering into a transaction may determine the character of the whole transaction.

This is a principle from Iswera quoted with approval in Kirkham.

The general approach, when the facts allow, is to argue in the first instance that the transaction is unequivocal. This means identifying as many badges of trading as possible.