Badges of Trade

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Since new rules came into force which concern the expansion of information provided to HMRC by online platforms, the question of whether someone is ‘trading’ or not has come into focus once again. Given income arising from a trade is taxable in the UK, and tax legislation inadequately defines what constitutes a trade, it is important for taxpayers to understand whether they might be considered as trading or not.

The tests to apply are commonly known as the ‘badges of trade’. These badges have developed through case law and are applied to any given situation to help conclude on whether an activity constitutes a trade. 

The recent wider interest in those selling goods via online marketplaces has led to some misunderstandings that require correction. In short the suggestion that someone selling their personal items on online platforms like Ebay or Vinted is automatically trading is almost certainly going to be wrong. This is because when applying the badges of trade to their circumstances, on balance that activity is unlikely to constitute a trade.  


The badges of trade were first identified in a 1955 report by the Royal Commission on the Taxation of Profits and Income. This initially identified six badges from a review of the case law up to that point but these have expanded over time as case law has developed. Below are set out the badges of trade currently used by HMRC.

No one single test (or badge) is necessarily conclusive and consideration should be given to each of the nine badges of trade. The approach by the courts in using badges of trade has been to decide questions of trade on the basis of the overall impression gained from a review of all the badges.

The nine badges of trade

1. Profit-seeking motive: Seeking a quick profit is indicative of a trading motive; a long-term capital appreciation and yield would indicate an investment.

2. Frequency of transactions: A large number of similar transactions taking place is more likely to indicate a trade, but a single transaction is more likely to be an investment.

3. Nature of the asset: Certain assets are more likely to be indicative of a trading transaction. For example, an asset which does not produce a yield is more likely to be purchased as a trading transaction. In the case of Rutledge v CIR, the taxpayer purchased 1 million toilet rolls and sold them on for a profit. Even though this was only a one-off transaction, he was found to be trading as you would not buy toilet rolls as an investment.

4. Connection with an existing trade: If, for example, a house builder decided to sell a car, then that is unlikely to amount to a trade in cars. However, if a mechanic decided to sell a car, then there is a stronger link to an existing trade and they could utilise their knowledge of the industry to secure a better price.

5. Changes to the asset: Where an asset has been modified or adapted to make it more readily marketable, it may indicate that that there is a trading motive.

6. The way the sale is made: If the asset was sold in a way that is indicative of other similar assets, then this may indicate a trading motive.

7. Financing Arrangements: Obtaining short-term finance to acquire an asset knowing it is to be sold shortly is indicative of a trading transaction.

8. Length of ownership: Traders do not usually retain stock for a long time, they normally seek a quick turnaround on ownership. An investor is more likely to hold an asset for a longer period of time.

9. Method of acquisition: An asset that is acquired by inheritance, or as a gift, is less likely to be the subject of trade.

Applying this in practice

One of the main reasons we do not have a statutory test for defining what constitutes a trade is because of the infinite permeations and factors which may be present (or not) when a taxpayer sells an item or service. Applying the badges of trade is subjective so those taxpayers who are challenged by HMRC should instruct an experienced and competent advisor to carefully review their case and apply the badges of trade to confirm whether a credible defence can be argued.

If HMRC has written to you asserting that you are trading and you do not agree, or if you believe you are likely to be considered trading and would like to understand more about making a voluntary tax disclosure, please contact Menzies’ Tax Disputes and Disclosures team:

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