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HMRC internal manual

Business Income Manual

Stock: meaning of: case law

To decide what is stock you need to understand the trade

Case law confirms that in order to decide whether a particular asset of the business is trading stock you first need to establish the nature of the business. An asset will be trading stock of the business consists of acquiring that asset with the intention of selling it at a profit. That is why land can be trading stock for a builder but a fixed asset for another business. Exceptionally it is possible for a trader to carry on two separate businesses where the same type of asset in one business is trading stock and in the other a capital asset.

The best known case is Gloucester Railway Carriage and Wagon Company Ltd v CIR [1925] 12TC720. The company manufactured or bought wagons and then either sold them or hired them out. Warrington, LJ thought the crucial question was `a question of fact - did the appellants carry on separate trade or business concerned exclusively with the letting on hire of wagons appropriated by them to that purpose, or was the letting of the wagons merely one means of earning profits in the business carried on by them?’ He believed there was sufficient evidence to support the Commissioners’ finding that `the company carried on one trade only, that of manufacturing and dealing with wagons for the purpose of profit, and that selling or letting the wagons was nothing but two modes of earning profits in the one trade.’ North Central Wagon and Finance Co., Ltd v Fifield [1953] 34TC59, was another case where the courts found that there was a single trade although here the wagons were purchased rather than manufactured.

In both cases of Spiers & Son Ltd v Odgen [1932] 17TC117, and Grenville Building Co Ltd v Oxby [1954] 35TC245, the builders built for sale, but on occasions let buildings before selling them. The profits on the sale of the let buildings were recognised as trading profits.

In Rees Roturbo Development Syndicate Ltd v Ducker [1928] 13TC366, a company was formed to acquire and exploit patents, and throughout its existence its only assets were patents from which it received royalty income. It sold some of the patents, the profits from which were found to be trading income. The decision rested on a finding of fact by the Commissioners, but in his judgment Rowlatt J cast some light on the distinction between trading stock and a capital asset:

`In one sense the words “capital asset” are words of art, because you do not have one set of assets representing capital and another set of assets representing income, of course; but what is meant by the phrase “capital asset” is that this is an asset which represent fixed capital as opposed to circulating capital, that is to say, that this is an article which is possessed by the individual in question, not that he may turn it over and make a profit by the sale of it to his advantage, but that he may keep it and use it and make a profit by its use. Then if an article of that sort is sold at a profit, that profit is not a profit of trade.’

J Bolson & Son Ltd v Farrelly [1953] 34TC161 concerned a company carrying on both a shipyard business and a passenger carrying business. In the course of its passenger carrying business it bought certain ships, used some of them for carrying passengers, and then sold them. In the Court of Appeal Jenkins LJ drew attention to `the cheap rates at which these vessels or some of them were bought, the large sums which were spent on reconditioning them, the profits made on their resale, the number of these transactions, and the frequency of their recurrence’ and thought the Commissioners were right to conclude that the trade consisted not only of the passenger business but also the purchasing, reconditioning and sale of ships.

The special circumstances of hire trades are discussed at BIM33040.