Home 5 Income Tax 5 The badges of trade

The badges of trade

23 November 2023

The 'badges of trade' tests, whilst not conclusive, are used by HMRC to help determine whether an activity is a proper economic trade / business activity or merely a money-making by-product of a hobby. Careful consideration needs to be given to

HMRC uses the ‘badges of trade’ tests to assist in determining whether an activity is a legitimate economic transaction/business or simply a profit-making by-product of a hobby, though they are not conclusive.

Careful consideration needs to be given to deciding whether a hobby has become a taxable trading activity. The approach by the courts in using the 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.

HMRC will consider the following nine issues as part of their overall investigation (badges of trade tests) as to whether a hobby is actually a transaction:

  • 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 the sale was carried out
  • The source of finance
  • Interval of time between purchase and sale
  • Method of acquisition.

Even if HMRC deems the activities a transaction (aligned with the badges of trade tests), taxpayers can claim up to £1,000 per year tax-free from their hobby using the trading allowance.

Source: HM Revenue & Customs Tue, 21 Nov 2023 00:00:00 +0100

You may also like these

Here are some more articles that might interest you

Expert Advice

If you’d like more information on anything you’ve read, we’re here and happy to help