BIM56830 - Financial traders - instruments and shares: key areas to explore in meetings

Whether an activity of buying and selling shares constitutes a trade is a question of fact. As with any other activity, you need to consider the relevant circumstances as a whole before coming to a decision on whether the activity amounts to a trade or not. A meeting with the person carrying on the activity is the best way of obtaining the information needed.

Key areas to explore in the discussion are set out below. However, this should not be considered an exhaustive list and you should pursue any other relevant lines of enquiry in a particular case.

  • The experience of the person carrying on the activity, particularly if that person is, or ever has been, regulated by the Financial Conduct Authority (FCA) or its predecessor the Financial Services Authority (FSA).
  • The reason for commencing the activity, particularly if the person had little or no previous experience.
  • How the activity was funded initially.
  • Whether any steps were taken to notify the commencement of a trade for Income Tax, Corporation Tax and National Insurance purposes.
  • How precisely the activity is carried out and whether this is done in a commercial way. If appropriate, identify all the steps in each type of transaction.
  • The profit-making strategy. Ask to see any business plan drawn up. If one was not prepared on the basis that third-parties were not involved, you would still expect the person to have some idea of how they proposed to make a profit. How realistic was that plan? What arrangements were put in place to review the performance of the activity and, if such a review was carried out, what changes, if any, were implemented? Was a limit placed on the amount of losses that would be tolerated?
  • Whether a strategy was put in place to limit losses. This might be a ‘stop-loss’, which effectively caps losses at a certain level, or a hedging strategy in case the market moves against expectations.
  • The type of instruments bought and sold, for example quoted shares or instruments such as options and swaps. The ease (or lack of) with which the items can be bought and sold may be relevant to the overall decision.
  • Whether the person deals in a wide range of instruments. A person who buys only particular shares, or operates in a narrow area of the market, may be using experience but may also be exposed to greater risk of adverse market movements which a regulated dealer would be able to limit. It might even cause the person to cease dealing for a time in contrast to a regulated dealer who seeks to make money from any market situation (see BIM56820).
  • Whether the person actually uses any specific acumen and experience in the transactions carried out. It may be relevant in this connection whether the person uses an ‘execution only’ service from the broker (where the broker simply carries out the client’s instructions), or whether more detailed financial advice is received commensurate with operating a portfolio of investments. If use is made of any ‘robot’ program, what influence does the person have on how the program operates?
  • What research does the person undertake prior to carrying out any transactions? For example, does he act on a tip from the financial pages of a newspaper, or has he access to expensive real-time information services? Does he undertake a thorough examination of the companies whose shares he might contemplate buying? Remember that only by carrying out actual transactions can any research, however extensive, bring the person profits, so compare the stated research with the number and frequency of transactions.
  • The number and frequency of transactions.
  • The length of time for which instruments are held. Are they bought and sold within minutes, or retained for some months or even longer? Be aware that, in some cases, transactions may be rolled over on a number of occasions, so they appear to be held long-term, but are in fact conceptually different from a long-term investment.
  • The time devoted to the activity. Consider how the person’s other commitments are likely to affect the amount of time available to devote to dealing.
  • Compare and contrast the activity with any dealing in financial instruments prior to the date on which trading is said to commence. There is a discussion at BIM56930 on whether particular activities amount to a separate trade or are bound up with an existing investment activity. Identify the grounds for which the person asserts that the activity now amounts to a trade.
  • Whether a service is provided to third parties.
  • Whether any dividends are returned as trading or investment income?
  • The extent of the records kept or provided by brokers. Where transactions are carried out on a margin there will be specific documentation in relation to this between the broker and the individual.
  • Whether there is any fiscal motive for undertaking particular transactions.
  • Whether there is any non-trading motive for carrying on the activity, such as a hobby interest.

Reviewing the information

You should check the information provided against the paper records of the transactions, particularly in relation to the number and frequency of transactions, the length of time for which individual holdings were retained, and the range of instruments bought and sold.

Also check whether the information obtained is consistent. For example, in Wannell v Rothwell [1996] 68 TC 719, Robert Walker J said:

‘So in the only complete year of assessment, when the appellant was entering into transactions in both shares and commodities, there were in all 30 pairs of purchase and sale transactions: 60 buy or sell orders in the whole year. It is hard to know how this is to be reconciled with the picture of 8 to 16 telephone calls a day between the Appellant and his broker; and, if this matter was explored in cross-examination, the outcome is not recorded in the decision.’