Roman Rudak
Case study ‘The Badges of Trade’
Ali is an employed motor mechanic who in his free time also buys cars at the auction, restores them
and sells them on. As not all activities related to buying and selling are recognised as trading by HMRC.
To establish whether the activity he is carrying on will be deemed as trading or not I will refer to the
badges of trade which will help to understand Ali’s circumstances better.
Firstly, it is vital to establish if a person is seeking to make a profit, the presence of a profit-seeking
motive will help us to determine if activity will be deemed as trading. Ali buys cars then repairs them
and once the cars are in a good condition he resells cars at the auction with an intention to make a
healthy profit. Any profits made he reinvests into another car and puts the rest of the proceeds away
with an intention to set up his own business. It is evident that Ali’s only intention is to acquire an asset
and re-sell it at a profit without any intention of holding it for longer term. In IRC v Fraser 1942 24 TC
498, an isolated transaction in the purchase and resale of whisky in bond was held to be an adventure
in the nature of trade. The nature of the commodity and quantity purchased was such that it could
not reasonably be considered to be for own consumption, and there was insufficient evidence to
indicate an investment motive. Based on the decision in IRC v Fraser 1942 we can state that Ali’s
activity would be considered as trading. Even that the case is about resale of whisky which was bought
in a big quantity we can relate it to Ali’s circumstances as he purchased an asset not for his personal
use but with an intention to re-sell it at a profit. However, intention to make a profit may not
necessarily indicate trade, but an intention to trade clearly constitutes trading that is why it is
important to examine the full picture.
