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.