A project completed in partial fulfilment of the representation of the Bachelor of Science Degree in Business Administration. University of Technology Jamaica. School of Business and Management. St. Andrew, Jamaica. Date Submitted: October 16, 2012 Badges of Trade discussion In law the circumstances under which a trade can take place are referred to as the badges of trade. Badges of trade are important in accounting because non-trade transactions are taxed differently. Badges of trade originate in case law.
Each case where the meaning of ‘trade’ is an issue must be decided on its own facts. The approach of the Commissioners and the courts over the years has been to examine the facts and look for the presence or absence of common features or characteristics of trade. Examples include the nature of the subject matter being exchanged, the length of ownership, and the reason for the transaction. The report of the Royal Commission on the Taxation of Profits and Income in 1955 reviewed that case law and identified six ‘badges’. However we will discuss only three of the six badges.
Supplementary work on or in connection with the property realized Firstly we’ll discuss Supplementary work on or in connection with the property realized which states that if the property is worked up in any way during the ownership so as to bring it into a more marketable condition; or if any special exertions are made to locate or attract purchasers, such as the opening of an office or large-scale advertising, there is some evidence of trade. For when there is an organized effort to obtain profit there is a source of taxable income.
But if nothing at all is done, the suggestion tends the other way. For example, a sales campaign by advertisement or the organization or employment of a selling agency or sales staff. An illustrating this principle is In Martin v Lowry [1926] the individual bought a very large quantity of linen with the intention of reselling it at a profit. In the course of this activity he set up a large and skilled organization for disposing of the linen in smaller quantities including the establishment of a sales office; the employment of staff and an expert in linen; and an extensive advertising campaign.
This sales organization was an important factor in the Commissioners’ decision that he was trading, a view with which the courts agreed. Similarly, the breaking down of assets into smaller lots to facilitate a sale may be a pointer to a trading motive, For example, in Cape Brandy Syndicate v CIR [1921] the work on a large quantity of Cape brandy to ship it to the UK, blend it expertly with French brandy, re-cask it and sell it in numerous lots was all part of the evidence on which the Commissioners were entitled to find that a trade was carried on.
The circumstances that are responsible for the realisation Secondly the circumstances that are responsible for the realisation, The Royal Commission on the Taxation of Income and Profits in 1955 suggested that circumstances that were responsible for the realisation should be considered. Their report said: ‘There may be some explanation, such as a sudden emergency or an opportunity calling for ready money, which negatives the idea that any plan of dealing encouraged the original purchase’.
There are few clear examples in case law of this principle being used to support a claim that a person was not trading. In West v Phillips [1958] a builder sold his houses which he had admittedly held as an investment for many years. He was assessed under Case I on the profits from the sales and the Commissioners found that the houses had changed their character to trading stock when the builder set up a sales organisation to dispose of them. The court found that this inference of a change of intention was unjustified.
It paid insufficient regard to the circumstances that forced him to sell. a. he owed large amounts of money to his bankers and building society which could not be found out of the rental income; b. rent control made the lettings uneconomic; and c. There were substantial tax arrears to be met. By way of contrast, in Mitchell Bros v Tomlinson [1957] a change of intention was found to be justifiable, despite claims that the sales of former investment properties had been motivated by leasing becoming uneconomic.
That is, an increase in repair costs and the need to realise the partnership on the death of a partner. However, in this case there was a great deal of other evidence that a trading intention had been established well before the partner died. Another case that looks at the circumstances for realization is Jamaica sugar estate ltd v IT assessment committee 1948; the insurance money received from the British government in compensation for the loss of the company’s ships during the war was invested.
When the company needed the money to make the progress payments for the building of a new ship, the form of investment was changed into one that was ready realisable to meet the progress payments. The interest received on this investment was not taxable as the court’s decision was that the company was not trading in stocks and shares. Motive And finally, motive is evidence that the sole object of acquiring an asset was to re-sell it at a profit, without any intention of holding it as an investment, is a pointer to the conclusion that a trade is being carried on.
However, the presence of a profit-seeking motive is not necessarily a decisive pointer to the existence of a trade. It is only one factor to be weighed along with all the other relevant factors. Some assets are more likely to be held as investments than others are. For example, shares may be bought with the intention of making a profit. However, because of the inherent investment nature of shares, in the absence of enough of the other badges of trade, the purchaser will be making and realising capital investments and not trading.
In Salt v Chamberlain [1979] which concerned losses made by an individual through the buying and selling of quoted securities with the intention of making a profit, Oliver J said at page 154”Where the question is whether an individual engaged in speculative dealings in securities is carrying on a trade, the prima facie presumption would be that he is not. ” Despite a claim that other badges of trade were present, the General Commissioners held that the transactions were not a trade and the court declined to disturb their finding.
The existence of a profit-seeking motive is a question of fact that is not necessarily determined by the person’s professed intentions. Where appropriate it can be inferred from the surrounding circumstances . In Rutledge v CIR [1929] the Lord President said at page 496:”It has been said, not without justice, that mere intention is not enough to invest a transaction with the character of trade. But, on the question whether the appellant entered into an adventure or speculation, the circumstances of the purchase, and also the purchaser’s object or intention in making it, do enter, and that directly, into the solution of the question.
There are cases in which the purpose of the transaction of purchase and sale is clearly discernible. Motive is never irrelevant in any of these cases. What is desirable is that it should be realised clearly that it can be inferred from surrounding circumstances in the absence of direct evidence of the seller’s intentions and even, if necessary, in the face of his own evidence. These ‘badges’ will not be present in every case and of those that are, some may point one way and some the other. The presence or absence of a particular badge is unlikely, by itself, to provide a conclusive answer to the question of whether or not there is a trade.
The weight to be attached to each badge will depend on the precise circumstances. The approach by the courts has been to decide questions of trade on the basis of the overall impression gained from a review of all the badges.
References
- Mendes, M & McLean, R. A (2007). Essentials of Jamaican Taxation Third Edition. Volume 1. CFM Publications.
- Great Britain. Smith, D. G. & Macpherson, A. (2008-09). Taxation Law & Practice. KPMG. China Retrieved from http://www. hmrc. gov. uk/manuals/bimmanual/bim20205.
