On 10 April 2019 Augustine purchased four dilapidated vintage motor cars for £40,000 each. The restoration of the four motor cars was completed on 10 March 2020 at a cost of £60,000 per motor car. Augustine immediately sold all the motor cars for a total of £1,000,000.

Augustine was then offered employment elsewhere in the country commencing on 6 April 2020. He therefore sold the equipment for £29,000 on 20 March 2020, and repaid the bank loan on 5 April 2020.

As he has just been indulging his hobby, Augustine believes that the disposal of the vintage motor cars during the tax year 2019/20 should be exempt from tax. 

He has done some research on the Internet and has discovered that whether or not he is treated as carrying on a trade will be determined according to the following six ‘badges of trade’:

(1)     The subject matter of the transaction. 

(2)     The length of ownership.

(3)     Frequency of similar transactions. 

(4)     Work done on the property. 

(5)     Circumstances responsible for the realization. 

(6)     Motive.

Augustine had no income during the tax year 2019/20 except as indicated above.

Required:

(a)     Briefly explain the meaning of each of the ‘badges of trade’ listed in the question. You are not expected to quote from decided cases. 

(b)    Briefly explain why Augustine is likely to be treated as carrying on a trade in respect of her vintage motor car activities.                                   

(c)     Calculate Augustine’s trading profit for the tax year 2019/20, if he is treated as carrying on a trade in respect of his vintage motor car activities. 

(d)    Explain why the cash basis for calculating the taxable trading profit is not available for Augustine.  

Answer rating: 100% (QA)

Solution a The badges of trade tests while not being conclusive are used by the HMRC Her Majestys Revenue and Customs to help determine whether an activity is a proper economic business activity or me... View the full answer