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HMRC internal manual

Business Income Manual

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Meaning of trade: exceptions and alternatives: illegal activities - what is a trade?

The test as to whether or not an illegal activity is assessable is as Rowlatt J summarised the issue in Mann v Nash [1932] 16TC523 at page 528:

‘Is this a trade within the meaning of Income Tax Acts or is it not?’

In deciding whether or not an activity is a trade, you should follow the guidance at BIM20050 onwards.

There is only a limited amount of guidance from the Courts on the type of illegal activities that amount to a trade:

  • smuggling alcohol for sale is a trade (Lindsay, Woodward & Hiscox v CIR [1932] 18TC43).
  • operating illegal gaming machines is a trade (Mann v Nash [1932] 16TC523).

In addition there are also a number of statements made in passing:

  • drug dealing is a trade (Lord Sands in Lindsay, Woodward & Hiscox v CIR [1932] 18TC43 at page 56).
  • burglary or housebreaking is not a trade (Lord Denning, in J P Harrison (Watford) Ltd v Griffiths [1962] 40TC281; Lord Sands in Lindsay, Woodward & Hiscox v CIR [1932] 18TC43 at page 56 and Finlay J in Southern v AB [1933] 18TC59 at page 73).
  • receiving stolen goods may be a trade (Denman J in Partridge v Mallandine [1886] 2TC179).

There is little supporting reasoning to these statements, the view being expressed as if it was self-evident.

When the examples given are considered against the guidance in BIM20050 onwards, we find that the opinions expressed are in line with the general case law on trading. For example, Lord Denning, in J P Harrison (Watford) Ltd v Griffiths [1962] 40TC281, at page 299, considered the operations of a gang of burglars:

‘Take a gang of burglars. Are they engaged in trade or an adventure in the nature of trade? They have an organisation. They spend money on equipment. They acquire goods by their efforts. They sell the goods. They make a profit. What detail is lacking in their adventure? You may say it lacks legality, but it has been held that legality is not an essential characteristic of a trade. You cannot point to any detail that it lacks. But still it is not a trade, nor an adventure in the nature of trade. And how does it help to ask the question: If it is not a trade, what is it? It is burglary, and that is all there is to say about it.’

Comparing this with the badges of trade (see BIM20200 onwards) we find that:

  • the team is providing goods to a third party customer (the fence) - see BIM20102 
  • they are seeking to make a profit by their activities - see BIM20210 for profit seeking motive
  • they have an organisation and use specialised equipment - see BIM20280 
  • they carry out repeated operations - see BIM20235.

What is lacking is the commercial character. They do not obtain their goods by normal commercial means such as buying or growing them. As noted at BIM20315, it is difficult to argue that someone who acquires an asset as a gift or inheritance is trading when they come to sell the asset.

Similarly in Partridge v Mallandine [1886] 2TC179, Denman J suggested that someone carrying on a ‘systematic business of receiving stolen goods’ (a ‘fence’) would be taxable. This is entirely in line with the guidance at BIM20050 onwards. If the activity is carried out as a business the profits are assessable as trade profits. If it is not, then the transaction is not liable to tax on income. Rowlatt J said in Ryall v Hoare [1923] 8TC521 at page 525:

‘a casual profit made on an isolated purchase and sale, unless merged with similar transactions in the carrying on of a trade or business is not liable to tax.’

The conclusion is that the test is simply whether the activity involves the acquisition and provision, on a commercial basis, of goods or services to a customer for reward?

Pure crime (extortion or burglary) does not involve the commercial acquisition and provision of goods or services.

Selling controlled drugs and smuggling goods for sale (as opposed to personal consumption) may well involve the commercial acquisition and provision of goods or services.

Because of the complexity of law and accountancy relating to illegal activities you should contact CTISA (Technical) at an early stage if you consider that a taxpayer is taxable on the profits of an illegal activity.