CHAPTER 5 - Trading Profits

Which two of the following statements indicate that a trade is being carried on?

A Amy has just sold a house that she bought three months ago. She has spent £40,000 to make the property more attractive to potential purchasers. Amy has not lived in this house.

B Ben has sold some shares that he has owned for 10 years for substantially more than the original cost.

C Caitlin, a student, has cash flow problems and sells a car that she bought three months ago.

D Dante has an interest in vintage cars. He has just sold a car that he has been renovating for the last six months. This is the seventh renovated car that he has sold in the last two years.

A Amy has just sold a house that she bought three months ago. She has spent £40,000 to make the property more attractive to potential purchasers. Amy has not lived in this house.

D Dante has an interest in vintage cars. He has just sold a car that he has been renovating for the last six months. This is the seventh renovated car that he has sold in the last two years.

Which two of the following are not badges of trade?

A The number of transactions

B Provision of own equipment

C Profit seeking motive

D Changes to the asset

E Correction of own work

B Provision of own equipment

E Correction of own work

According to the badges of trade, HMRC would probably view the purchase of 1,000,000 toilet rolls by an individual as being carried out:

A For personal use

B For their aesthetic value

C For long-term investment

D To be sold at a profit

D To be sold at a profit

The badges of trade are used for which of the following purposes?

• To determine whether an individual is trading in their own right or is an employee

• To determine whether a trading transaction is being carried out rather than a capital transaction

• To determine whether a trading receipt is taxable or exempt

• To determine whether a trading expense is allowable or disallowable

• To determine whether a trading transaction is being carried out rather than a capital transaction

What do the following factors suggest about the sale of an asset in determining whether or not the sale of a car is a trading transaction?

The seller has added accessories to enhance its value before sale

Suggests that this is likely to be a trade

What do the following factors suggest about the sale of an asset in determining whether or not the sale of a car is a trading transaction?

The seller works as a car salesman.

Suggests that this is likely to be a trade

Among the badges of trade, what do the following factors suggest about the sale of a building?

A short term loan has been taken out to make improvements to the building

Suggests that this is likely to be a trade

Among the badges of trade, what do the following factors suggest about the sale of a building?

The building being sold was purchased 12 years ago.

Makes this less likely to be a trade

Simon purchased an oil painting at a car boot sale for £3.50. It soon transpired that the painting was very rare and worth £20,000, so he decided to sell it to raise some cash for a holiday.

The badge of trade ‘profit seeking motive’ may suggest this sale is likely to be a trading transaction

False - Simon did not buy it with the intention of trading it to fund his holiday

Simon purchased an oil painting at a car boot sale for £3.50. It soon transpired that the painting was very rare and worth £20,000, so he decided to sell it to raise some cash for a holiday.

T/F: The badge of trade ‘existence of similar trading transactions’ may make the above sale look less like a trading transaction

True - we are not aware of any similar transactions.

Trading Allowance

Available allowance of £1000 to those who carry on a trade

If Trading Receipts for an Individual are less than £1000

these are not taxable.

Two ways to work out Taxable Trading Profits:

• Subtract the £1000, and the remaining are taxable trading profits

• Subtract the allowable expenses

Marina has trading receipts in 2024/25 of £1,300 and deductible expenses of £750. She makes all beneficial claims and elections.

What is Marina's trading income assessment in 2024/25?

A £0

B £250

C £300

D £1,000

C £300

• £1300 - £1000 (allowable expenses)

Penha has a hobby restoring antique furniture. He has just sold a restored antique table that he has owned for several years. He sold 10 items of restored furniture in 2024/25.

Which two of the following badges indicate that Penha is carrying on a trade in relation to this disposal?

A The number of transactions

B Interval of time between purchase and sale

C Changes to the asset

D Correction of own work

A The number of transactions

C Changes to the asset

Julie is a full-time employee working in the sustainability industry and earns a salary of £20,000 per year. She also runs an online eco lifestyle blog from which she receives advertising revenue. During the year ended 5 April 2025 her income from the blog totalled £900 and associated deductible expenses were £400.

What is Julie's taxable trading income for 2024/25?

A £Nil

B £500

C £900

D £20,500

A £Nil

• Her TRADE = eco lifestyle blog

• She receives £900 = less than £1,000, so no taxable income

Uliana has income from freelance work of £3,500 for 2024/25. Her allowable expenses are £900.

What are Uliana’s taxable trading profits for 2024/25, assuming all beneficial elections are made?

= £2,500

• £3,500 - 900 (allowable expenses) = £2,600

• £3,500 - £1,000 (trading allowance) = £2,500

• therefore, Uliana would choose the trading allowance method.

Diego has earned £6,000 in 2024/25 from providing private tuition. His allowable expenses are £1,300.

What are Diego’s taxable trading profits in 2024/25, assuming all beneficial elections are made?

= £4,700

• Allowable expenses = <£1000, so no Trading Allowance

• £6,000 - £1,300 = 4,700