UK tax legislation defines ‘trade’ as including ‘every trade, manufacture, adventure or concern in the nature of trade’: The difficulty with this definition is that (as well as being somewhat circular) it is very wide-ranging and extends to activities which may not ordinarily be thought to be trading activities.

Charities often fail to appreciate that they are conducting a trading activity. There is a common misconception that, because an activity is being conducted by a charity and any surpluses are being applied for charitable causes, a trading activity does not exist. From a direct tax perspective, however, it is the nature of the activity as opposed to the organisation carrying out the activity that governs whether or not a trade exists. Many of the tax cases relating to the existence of a trading activity have relied on the ‘badges of trade’ principles. These principles provide indicators against which it can be judged whether or not an activity amounts to a trading activity:

  • a profit-seeking motive
  • the existence of similar trading transactions
  • the number and frequency of transactions
  • the method of finance
  • the interval between purchase and sale
  • the selling organisation
  • the method of acquisition
  • changes to the asset before sale and
  • the nature of the asset.

It is not necessary for all of the above factors to be present to determine that a trading activity exists, but they do provide a general guide.

HMRC has published full guidance on charities and trading.

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