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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 - no moral test

The UK Courts have not followed the approach taken by the Irish Supreme Court in Hayes v Duggan [1929] IR 406, where the Irish Court took the view that the illegality of an activity can affect its taxability.

Rowlatt J considered this approach in Mann v Nash [1932] 16TC523. In this case the taxpayer sought to exclude from his trading profit, the profits arising from illegal fruit machines. Rowlatt J noted, at pages 530 and 531:

‘I myself cannot see why this letting out of the machines in a commercial way, with a view to the reception of profits in a commercial way, is not trade, adventure, manufacture or concern in the nature of trade. On the words, it clearly is. The question really is whether as a matter of construction those words are to be cut down by an overriding consideration that the trade is tainted with illegality. The great mainstay of Mr Field’s argument… was the case of Duggan, decided in the Irish Free State, and that decision of the Supreme Court seems to have gone upon this principle, that no construction could be admitted which recognised that the State should come forward and seem to take a profit from what the State prohibited, because the State ought to have prevented it;… But, in truth, it seems to me that all that consideration is misconceived. The Revenue representing the State, is merely looking at an accomplished fact. It is not condoning it; it has not taken part in it; it merely finds profits made from what appears to be a trade, and the Revenue laws happen to say that the profits made from trades have to be taxed, and they say: ”Give us the tax.” It is not to the purpose in my judgement to say: ”But the same State that you represent has said they are unlawful;…”’

He went on to say:

‘”Is the State coming forward to take a share of unlawful gains?” It is mere rhetoric. The State is doing nothing of the kind; they are taxing the individual with reference to certain facts. They are not partners; they are not principals in the illegality, or sharers in the illegality; they are merely taxing a man in respect of those resources. I think it is only rhetoric to say that they are sharing in his profits, and a piece of rhetoric which is perfectly useless for the solution of the question which I have to decide.’

This decision was followed and endorsed by Finlay J in Southern v AB [1933] 18TC59 who went on to say at page 73:

‘I desire to point out exactly why, assuming as I am quite willing to assume, the burglar does not come within the purview of the Income Tax Acts: if he does not come within the purview of the Income Tax Acts, it is because what he does is not the carrying on of a trade within Case I, and it is not because, carrying on a trade within Case I, he is taken out by some considerations of morals or anything of that sort. The question always is, I think, a short question of construction: is there a trade - I use “trade” compendiously; trade, or the other words referred to - carried on within the meaning of Case I?’

More recently, in a different context, Lord Browne-Wilkinson said in McGuckian v CIR [1997] 69TC1 at page 77B:

‘But, as Mr Nugee (counsel for the taxpayer) rightly submitted, liability to tax depends on statutory construction not moral disapproval.’