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HMRC internal manual

Business Income Manual

Meaning of trade: badges of trade: memorandum of association

The fact that an operation is one which a company has power under its memorandum of association to carry out is not conclusive evidence that it is a trading operation of the company. You should have regard to what in fact constitute the company’s trading operations.

For example, in Devon Mutual Steamship Insurance Association v Ogg [1927] 13TC184 the company carried on its main business of marine insurance. It also sustained a loss in connection with contracts for the construction and sale of four steamships. This latter activity was not part of the insurance business and it sought to deduct the loss on the grounds, inter alia, that it arose in a separate trade of dealing in ships, which it was permitted to carry on under its memorandum. The Commissioners did not accept that that such a trade was in fact carried on.

See also Collins v Firth-Brearley Stainless Steel Syndicate Ltd [1925] 9TC520.

Following Lewis Emanuel and Son Ltd v White [1965] 42TC369, it was thought that a company could not speculate, as this would not be authorised by its memorandum of association: see Pennycuick at page 378. The point arose because the Crown had contended that some of the company’s activities (transactions on the Stock Exchange) were neither trading nor investment but formed a separate class of speculation. However, for all but charitable companies, Section 108 Companies Act 1989 removed the restrictions on companies to act within the limitations of their memoranda of association (see now S39 Companies Act 2006). In addition, in the non-tax local authority ‘swaps’ case of Hazel v Hammersmith and Fulham BC, Lord Templeman has stated that, in contrast to local authorities, individual trading companies can speculate as much as they please or consider prudent: see [1991] 2WLR at page 385E. Such speculative dealings do not necessarily amount to trading.