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HMRC internal manual

Business Income Manual

Meaning of trade: badges of trade: intention - dual motive transactions - links to non-trading undertakings or charities

Operations carried on in connection with non-trading or charitable activities constitute a trade if they can be segregated and in themselves fulfil the conditions of trading.

In Religious Tract and Book Society of Scotland v Forbes [1896] 3TC415, the Society was founded for the diffusion of religious literature and ran a shop for the sale of bibles etc. This shop was carried on along commercial lines and made profits. In addition the Society sent out colporteurs whose duties were to sell the literature and act as cottage missionaries. These latter activities sustained large losses, were not commercial and were not capable of making profits.

The court found that the colportage activities were not a trade and not carried on as part of the business of bookselling. The losses could not be set against the shop profits, which were separately assessable. The Lord President said at page 419:

‘…while I completely assent to the view that the establishment and conduct of the shops and the establishment and conduct of the colportage all rest upon the same ultimate motive, yet at the same time the two operations seem to be essentially distinguished. The shops are simply bookseller’s shops - the other is a combination of the sale of books with a missionary enterprise…’

See also Brighton College v Marriott [1925] 10TC213, Earl of Jersey’s Executors v Bassom [1926] 10TC357, Earl of Derby v Bassom [1926] 10TC357 and British Legion, Peterhead Branch, Remembrance and Welcome Home Fund v CIR [1953] 35TC509.

Once such a trade has been identified, you should ensure that income and expenditure attributable to non-commercial operations is excluded from the computation of trading profit.

The manner in which profits from a trading activity are applied does not have any bearing in deciding whether that activity amounts to trade.

Voluntary organisations, such as local committees or Round Tables, may have activities that amount to trading, such as occasional sales of goods from shops or stalls, running donkey derbys, fireworks displays, carnivals and other events. BIM24792 onwards give guidance on the treatment of the profits of such a trade. The online detailed guidance note Charities - Trading and business activities sets out the guidelines on the tax treatment of trades carried on by charities.

As regards mutual concerns, see BIM24000 onwards.