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HMRC internal manual

Business Income Manual

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Meaning of trade: mutual trading and members clubs: introduction: essential that the activity is a trade

What is a trade?

Whether the activities in question constitute a trade is a question of fact. Guidance on the general subject of whether particular activities amount to a trade is at BIM20050 onwards. You should look to see if the activities involved have the outward characteristics of trade. You can usefully apply the test from CIR v Livingston and Others [1926] 11TC538 (at page 542) that:

‘…the operations involved in it are of the same kind, and carried on in the same way, as those which are characteristic of ordinary trading in the line of business in which the venture was made.’

Further, although it is not essential that there should be a profit for activities to amount to trade, there must be an element of commerciality. The subjective test, of whether there was the intention to make a profit, has played a central role in the development of case law; for example in Ransom v Higgs [1974] 50TC1 at page 88G:

‘Trade involves, normally, the exchange of goods or of services for reward - not of all services … but there must be something which the trade offers to provide by way of business. Trade, moreover, presupposes a customer … you must trade with someone.’

The so-called ‘badges of trade’ (see BIM20200 onwards) can also be helpful indicators in some cases.

Mutual associations are established for a variety of reasons. Many mutual associations have no overt profit-seeking motive or may be required to apply their profits to particular ends. Such a state of affairs does not prevent them from carrying on a trade.

The absence of a profit-seeking motive does not preclude the carrying on of a trade - see for example Brighton College v Marriott [1925] 10TC213. Brighton College was a company, limited by guarantee. The company was formed to carry on a public school. Under its Memorandum of Association the whole of the company’s income and property was applied solely towards the promotion of the objects of the college, including the remuneration of its officers and other persons for services rendered.

The fees charged for attendance at the school exceeded the current expenses. The surpluses were mainly applied in paying interest on, and in reducing, mortgage debts incurred in connection with extensions and improvements of the college.

The Court of Appeal decided that the surplus fees were profits or gains arising from the carrying on of a trade assessable to Income Tax as trade profits notwithstanding that:

  • the surplus was applied in a particular way, or
  • the college’s professed intention was not to make a profit.

The Master of the Rolls, Pollock, explained that what the college did with its surplus did not have a bearing on the taxability of that surplus:

‘…it is clear that under Income Tax law the fact that profits when made are to be devoted solely to the advancement of the charity will not induce an exemption. Profits when made are subject to the tax, and their destination does not secure immunity for them.’

Pollock M.R. goes on at page 221 to quote with approval Cotton L. J. in Hermann Gusav Erichsen v W H Last [1881] 4TC422, at page 427:

‘…when a person habitually does a thing which is capable of producing a profit for the purpose of producing a profit and enters into a contract habitually, he is carrying on a trade or business…’

The House of Lords unanimously agreed that the college was trading. Lord Blanesburgh made the following points:

  • The college did not lose its charitable status by charging fees.
  • The charging of fees did not of itself make the college’s activities into a trade.
  • Whether activities amount to a trade is always a question of fact.
  • What the college did with any surplus was irrelevant.
  • The important issue was whether the activities were conducted on a commercial basis.

That an entity professes to conduct its affairs on a ‘not for profit’ basis does not preclude a finding of trading. In CIR v The Hyndland Investment Co Ltd [1929] 14TC694 at page 699 the judge tells us:

‘…the question is not what business does the taxpayer profess to carry on, but what business does he actually carry on.’

In Royal Agricultural Society of England v Wilson [1924] 9TC62 at page 67 the judge tells us:

‘If you do the operations of trading and make a profit, it seems to me that you are carrying on a trade, which in that case becomes taxable, and you are carrying on a trade whether you make a profit or not, and whether you want to make a profit or not, because it is not a mere question of motive.’