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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Meaning of trade: exceptions and alternatives: illegal activities - the trading test

The UK Courts have decided that the test is whether or not the action is a trade.

Lord Sands in Lindsay, Woodward & Hiscox v CIR [1932] (18TC43) said at page 56:

‘I respectfully adopt the dictum of Lord Haldane, in delivering the judgement in the case of Smith [Canadian Minister of Finance v Smith [1927] AC193], that once the character of a business has been ascertained as being of the nature of trade, the person who carries it on cannot found upon elements of illegality to avoid the tax.’

The reference is to the judgement of Viscount Haldane in the Privy Council case, Minister of Finance v Smith [1927] AC193 where he said at page 197:

‘There are certain expressions at the end of the judgement of Scrutton LJ in Inland Revenue Commissioners v Von Glehn as to the scope of the British Income Tax Acts.

Their Lordships have no reason to differ from the conclusion reached in that case, but they must not be taken to assent to any suggestion sought to be based on the words used by the learned Lord Justice, that Income Tax Acts are necessarily restricted in their application to lawful businesses only. So far as Parliaments with sovereign powers are concerned, they need not be so. The question is never more than one of the words used.’

Although there is no recent case law on the taxation of illegal activities, the Courts have continued to apply this test in other areas. Looking at the question of fiscal purpose, Lord Hoffman said in McNiven v Westmoreland Investments Ltd [2001] 73TC1 at page 72:

‘Even if a statutory expression refers to a business or economic concept, one cannot disregard a transaction which comes within the statutory language, construed in the correct commercial sense, simply on the ground that it was entered into solely for tax reasons.’