Tax case law

Tax case law that should be considered

Indicators of a trade in financial transactions

The existence of a trade is a question of fact. The leading case in deciphering whether financial transactions undertaken by an individual might constitute trading was considered in Salt v Chamberlain, Ch D [1979] 53 TC 143.  In that case the taxpayer - a mathematician with knowledge of computers – had made losses in share dealing on the stock exchange.  It was held on the facts that Mr Salt was not trading. 

In Salt the six badges of trade were considered:

(a) The subject-matter of the realisation.
(b) The length of period of ownership.
(c) The frequency or number of similar transactions by the same person.
(d) Supplementary work on or in connection with the property realised.
(e) The circumstances that were responsible for the realisation. (f) Motive. [Page 146 para. 9.]

The High Court up held the Commissioners’ decision that the share dealings (approximately 200 over a period of 4/5 years) did not amount to a trade.  While weight was given to the type of transactions undertaken – i.e. share dealing, the way in which the transactions were undertaken was also critical.
Revenue submissions were summarised as follows:

"It was contended by the Inspector of Taxes that: (a) unless there were special circumstances when it would be correct to regard dealing in securities on the Stock Exchange as a trading activity, in the general run of cases individuals buying and selling such securities were not trading; (b) such transactions were not usually entered into as part of a trading activity; (c) such transactions were not trading transactions even though (i) there may have been a large number of them and (ii) they were entered into with a profit-seeking motive; (d) the organisation of his activity of buying and selling shares was such as to indicate that these activities were not part of a trade carried on by the Appellant; (e) the number, frequency and repetition of the Appellant's Stock Exchange transactions merely point to activities which fall to be considered under the capital gains tax legislation; (f) the Appellant did not sell on the share market, but bought and sold quoted shares as a customer of the market; (g) he did not appear to have any customers but was merely a passive observer." [Page 145 para. 7].

Application of Salt v Chamberlain

The application of the Salt decision to your client is not entirely clear.  Oliver J said:

“... I doubt whether the question whether in any given case a person is or is not carrying on a trade is capable of solution by the application of a logical progression of propositions culled from decided cases. The question is, I think, one of overall impression.”

The Commissioners noted that Mr Salt required no office facilities and the activities “…merely called for a telephone and money”.  This implies a greater degree of organisation on the part of your client as compared to the facts presented in Salt. Secondly, your client has had training as a financial trader and in the absence of any other business or employment it is arguable that dealing in futures might be regarded as his profession.   Mr Salt had no formal training or experience of financial markets and an alternative career as a mathematician.