The ‘badges of trade’ tests, are used by HMRC to help determine whether an activity is a trading activity (business). Careful consideration needs to be given when deciding if a hobby has become a taxable activity. If that happens, your trading activities will be subject to Income Tax and National Insurance. This post will provide basic information on badges of trade that HMRC use to establish if you are trading.
What are Badges of Trade?
HMRC will use some or all of the following nine criteria to assess if something is a trade:
- Profit-seeking motive
- The number of transactions
- The nature of the asset
- Existence of similar trading transactions or interests
- Changes to the asset
- The way sale is made
- The source of finance
- Time between purchase and sale
- Method of acquisition
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.
There have been many cases over the years as the answer has not been clear cut, which in turn have helped to create the badges of trade list by the precedents set.
The ACCA has also gone into further depth with some case references to assist you further.
The trading allowance permits a taxpayer to have up to £1,000 of trade income tax-free. More information on the trading allowance can be found on another blog post.