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HMRC internal manual

Business Income Manual

Computing the amount to assess: business changes: commencement: general principles

The date on which a trade starts determines the first tax year for which its profits come within the charge to tax or any losses arising from it may qualify for tax relief. It has a consequential effect on the duration of the first basis period (see BIM81015) and the apportionment of profits to the opening years’ basis periods (see BIM81065). The date of commencement of trading can determine when an accounting period of a company starts or ends (CTM01400 onwards) and the timing of capital allowances (CA11800)).

Generally, pre-trading expenditure is deductible from profits once trade commences but it is time limited. It is important to identify the date of commencement of the relevant trade where preparatory expenses have been incurred more than seven years previously (BIM46351).The classic definitions of trade in the House of Lords judgments in Ransom v Higgs [1974] 50TC1 stress the active nature of trading - the need to be providing goods or services, to be trading with someone (BIM20100).

In deciding on the date of commencement, the courts have distinguished between preparing to commence business and actually commencing business. As a general rule a trade cannot commence until the trader:

  • is in a position to provide those goods or services which it is, or will be, his or her trade to provide, and
  • does so, or offers to do so, by way of trade.

In the case of Mansell v Revenue and Customs Commissioners SPC551, the Special Commissioner took the view that, in order to be in a position to provide goods or services, the trader needs to have set up a business structure and have a specific trading activity in mind. A mere review of possibilities does not constitute carrying on a trade. The trade commences when operational activities begin. This does not necessarily require sales, but it does mean dealing with third parties in relation to the supplies which will be made, and it involves putting money at risk. The acquisition of goods, the provision of services, and entering into contracts are examples of operational activities.

The length of the setting up phase may vary (it can be particularly long where complex modern technology is involved). But once the business begins operational activities, offering to provide goods or services, then it has commenced trading. The activity need not be on a large scale. But the production and sale of a small amount of stock-in-trade resulting from, for example, the trial run of a process would not necessarily mean that a trade had started (the nature of the activity may be characteristic of testing rather than of the trade to be carried on).

The case of Napier v Griffiths [1990] 63TC745 underlines that whether a trade has commenced or not is a matter of fact. In the absence of any evidence to the contrary, the taxpayer was held to have commenced trading when he entered into his first contract of engagement as an electronic designer.