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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Financial traders - instruments and shares: introduction

It is often the case that individuals and companies entering into transactions consisting of buying and selling shares, securities and other financial instruments will describe them as ‘trades’. But this is not the same thing as being a trade for tax purposes, and the use of the term ‘trade’ in this context is misleading. Whether an activity amounts to a trade for tax purposes is a question of fact based on all the relevant circumstances.

Dealing as an integral part of an existing trade

In some cases, transactions in financial instruments form an integral part of an activity which is clearly a trade for tax purposes, for example a bank, insurance company or other similar financial concern. In such cases, the profits and losses arising from such transactions are normally taxed as part of the trading income of the entity concerned, unless the instruments are clearly being held for investment purposes. There is more discussion about this in BIM40805, General Insurance Manual (GIM5000+) and Chapter 2 of the Life Assurance Manual (available on the HMRC internet but not intranet).

Regulated share dealers

BIM56820 explains more about regulated share dealers, but there is usually no doubt that such dealers are carrying on a trade for tax purposes.

Other cases

Where the person carrying on an activity of dealing in financial instruments is not a regulated dealer, or the activity is not an integral part of an existing trade for tax purposes, it is necessary to carry out a thorough fact-finding exercise to determine whether the activity amounts to a trade. The best way of doing this is to have a meeting with the person who carries on the activity. BIM56830 sets out some important factual information you will need to obtain from the company or individual at the meeting.

When all the facts have been gathered in a particular case, you will need to decide whether or not the activity amounts to a trade. Other pages of this guidance provide further advice on how to do this.

BIM56840 deals with the relevance of case law, including the badges of trade.

BIM56850 and BIM56860 look in more detail at the position for individuals and BIM56870 at the position for companies.

There is also additional guidance on:

* Dealing in instruments other than shares, such as futures, options and contracts for difference see BIM56880 for individuals and BIM56890 for companies.
   
* Contracts for differences and spread betting BIM56900
* The use of particular investment strategies such as ‘shorting’ and ‘absolute return’ and how this is relevant to the trading question BIM56910
* Cases where the existence of a trade appears to be a factor in the success of an apparent avoidance structure BIM56920
* Pension funds and similar entities. BIM56930

Other sources of help

Cases of difficulty which cannot be resolved locally may be submitted to CTISA (Financial Products Team) in accordance with the general guidelines on making submissions. But you must first find the factsbefore seeking assistance.

The relevant Trade Sector Adviser, who is based within the LBS, may also be able to help where you have doubts that the activity is carried on in a way similar to that of dealers generally.