This part of GOV.UK is being rebuilt – find out what beta means

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 and to be trading with someone (BIM20100).  In the case of Mansell v Revenue and Customs Commissioners SPC551, the Special Commissioner distinguished between the acts of setting up and commencing a trade.  Acts of setting up are not the same as commencing or carrying on a trade.  He considered that a trade commences once the trader, having a specific idea in mind of his intended profit-making activities and having set the business up, begins operational activities.  Operational activities do not necessarily require sales, but do involve dealing with third parties immediately and directly in relation to the supplies which will be made and which it is hoped will give rise to the expected profits - the kind of activities which contribute to the gross rather than the net profit of the enterprise.

The length of the setting up phase may vary and can be particularly long where complex modern technology is involved.  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.

The case of Napier v Griffiths [1990] 63TC745 underlines that whether or not a trade has commenced is a matter of fact in each case.  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.

Trading 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).